(Bloomberg) -- The architect of the controversial austerity drive in Britain after the financial crisis said another period of belt-tightening will eventually be needed to deal with the fiscal damage wrought by the coronavirus shock.
George Osborne, who was chancellor of the exchequer from 2010 to 2016, said Boris Johnson’s government is right to be spending now to avert an economic catastrophe but cautioned that the additional debt created will ultimately have to be tackled.
As governments around the world pledge trillions in cash to cushion the impact of nationwide lockdowns, the debate is gradually shifting to how to pay for the measures. Economists and the International Monetary Fund have warned that inadequate spending now means a slower recovery and a higher debt burden in the future.
Osborne took an uncompromising approach to tackling a budget deficit that topped 10% of economic output in the aftermath of the global recession. The shortfall now stands at just 2% but the decline came at the cost of brutal cuts to public services and welfare payments, making him a target for anti-austerity campaigners and the opposition Labour Party.
“When this is over there is going to be a very large amount of debt and it’s not going to be bonanza time,” he said during a Confederation of British Industry Webinar event on Monday. “We’ll be going back into a period of retrenchment and trying to bring public-sector debt down. That is something we can focus on later.”
His warning comes days after the Office for Budget Responsibility, the fiscal watchdog that he created while in office, said a three-month lockdown could see the deficit swell to 273 billion pounds ($340 billion) in the current fiscal year -- 14% of gross domestic product -- and briefly push debt above 100% of output.
The deterioration reflects both the cost of government aid to protect jobs, incomes and businesses, and the hit to tax revenue from the downturn.
Britain is not alone in facing a dramatic fiscal shock, and a debate is raging across advanced economies about how authorities should respond. In the U.K., the discussion is politically charged. Nurses and other public-sector workers who bore the brunt of Osborne’s austerity by having their wages cut in real terms are now on the front-line in the fight against the coronavirus.
Osborne, now editor of London’s Evening Standard newspaper, cast doubt on the OBR’s projection that the economy could rebound quickly from the downturn in a so-called V-shaped recovery, saying the return to normality is more likely to be U-shaped.
“Markets are now expecting that,” he said. The crisis “has been going on long enough and the exit is too uncertain. You aren’t going to get a sharp bounce.”
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