Bank of England deputy governor Ben Broadbent has said resilient household spending has been “funded by tomorrow’s taxpayers” as he warned over the impact of the furlough scheme on UK public finances.
In an online webinar speech, the top policy-maker said the mammoth Government spending to support the economy and workers through the pandemic had helped buoy consumer spending, but was “no free lunch”.
The furlough scheme has been the “single most important factor” in helping protect household income from the hit to the wider economy, according to Mr Broadbent.
He said: “Spending by today’s consumers has in part been sustained and funded by tomorrow’s taxpayers.”
“This isn’t a free lunch – higher Government debt has to be paid for eventually,” he added.
It comes after Chancellor Rishi Sunak told MPs on Monday the nation’s public finances “have been badly damaged and will need repair” due to more than £280 billion of Government spending to support the economy.
Mr Sunak also gave a stark warning that the economy will “get worse before it gets better” given the latest lockdown.
Mr Broadbent – deputy governor for monetary policy, who sits on the Bank’s interest rate setting committee – said the economy was now expected to contract in the first quarter of 2021.
Following a predicted contraction of gross domestic product (GDP) – a measure of the size of the economy – in the final three months of 2020, this would see the UK enter into a double-dip recession.
Mr Broadbent said “GDP growth may have been the weakest on record but retail spending growth is just about the strongest”.
The furlough scheme launched last March when the first lockdown began have helped maintain the spending side of the economy.
“This has been done only at the expense of a material rise in public-sector debt, something that will have to be paid for over time,” he said.
Households switched spending from physical shops to online, as well as from areas seen as being risky in the pandemic to less risky alternatives – such as from restaurants to takeaway.
He said the shifts in spending and resilience meant inflation – currently running at 0.3% – had weakened less than the Bank expected.
The Government has spent £46 billion so far on supporting wages for those unable to work during the pandemic and extended the furlough scheme until the end of April.
While hugely costly, Mr Broadbent said it had been key in propping up the economy.
“The decline in aggregate consumer spending would almost certainly have been more protracted and more widespread – affecting not just activities that involve infection risk but those that do not – but for the furlough schemes,” he said.