Infected Blood Payouts Threaten Rishi Sunak’s Pre-Election Plan for Further Tax Cuts

(Bloomberg) -- UK plans to compensate thousands of victims of a decades-old contaminated blood scandal risk undermining Prime Minister Rishi Sunak’s ability to deliver a tax-cutting pre-election budget in the autumn.

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A final report into what’s been dubbed the worst treatment disaster in the history of the National Health Service is due for publication on Monday. Sunak — or one of his ministers — is likely to deliver a statement to Parliament that includes an apology and details a compensation package in excess of £10 billion ($12.7 billion) for the victims and their relatives, according to people familiar with the matter, who requested anonymity discussing unannounced plans.

The compensation will draw a line under a medical scandal that resulted in some 30,000 people being infected with HIV and Hepatitis C after being treated in the 1970s and 1980s with blood products and transfusions. But in seeking to address the anger of victims’ groups following years of delays, Sunak may also be reducing his chances of unleashing a fiscal giveaway ahead of a general election he’s widely expected to hold in the autumn.

“If this is paid out over an extended period, right the way through to four or five years’ time, it’s conceivable it will make it harder to meet the fiscal rules,” said Ben Zaranko, senior research economist at the Institute for Fiscal Studies, referring to the government’s self-imposed target to have debt falling as a share of the size of the economy in five years’ time.

“Given how close to the wind the government’s been sailing — meeting its rules by the finest of margins — a couple of billions of pounds could be the difference between them feeling comfortable calling a fiscal event or not,” Zaranko said.

Some in the British government play down the fiscal implications of the payouts. One official, speaking on condition of anonymity, said the compensation is likely to be treated by the Treasury as a one-off lump sum that doesn’t impact spending plans five years out, meaning it won’t hurt its ability to hit its key fiscal rule.

Nevertheless, one government official said Sunak is stuck between a rock and a hard place on the issue: To further delay risks a fresh wave of anger from victims who have waited decades for redress, yet accelerating payments means taking an fiscal hit at a politically inconvenient time.

The premier is still waiting to see the official inquiry’s final report before signing off the compensation, according to the people. Previous interim reports have advanced options that include differing levels of compensation depending on the damage caused to individuals by the infections, as well as detailing potential support for relatives of victims who have since died.

Infected Blood Inquiry Chairman Brian Langstaff has already recommended interim payments of £100,000 to the relatives of those who have died, and the government says £400 million has already been paid out. Total compensation could rise as high as £20 billion, according to one of the people.

The Cabinet Office, which is overseeing the compensation program, and the Treasury both declined to comment on how the payouts would be timed and accounted for.

“We are clear that justice needs to be done and swiftly,” a Cabinet Office spokesperson said in a statement, detailing an arms-length body that will be established to process the payouts. The body “will have all the funding needed to deliver compensation once they have identified the victims and assessed claims.”

At the last budget in March, Hunt had just £8.9 billion to spare against his target to have debt falling in five years — a margin near historical lows. That means a deterioration due to lower expectations for growth, or forecasts for interest rates to be higher for longer, as well as extra spending on compensation, could leave Chancellor of the Exchequer Jeremy Hunt with little or no room for maneuver to make tax cuts.

The fragility of Britain’s public finance was laid bare this week by a Bloomberg Economics estimate that Hunt will have no money for giveaways, facing instead a £45 billion budget hole to fill. Meanwhile, analysis by the National Institute for Economic and Social Research suggests weak growth and persistent inflation mean Hunt would probably have to raise taxes to balance the books at the next fiscal event.

The chancellor’s calculations could be further complicated by the need to show progress toward a pledge to spend 2.5% of GDP on defense by the end of the decade, as well as the potential bills for other compensation packages to gay veterans and postmasters who were wrongfully accused of stealing from the Post Office franchises they ran.

Sunak must call a general election before the end of January, and Hunt has made clear that he’d like to hold an autumn statement to announce further tax and spending plans. After cutting the national insurance payroll tax by 2 percentage points at each of the budget in March and autumn statement last November, the chancellor has laid out ambitions to keep reducing that tax. Another 2 percentage-point reduction in the main rate would cost the government about £9 billion.

Zaranko at the IFG said that if Hunt did hold a budget, he could run the risk of being told by the Office for Budget Responsibility, Britain’s spending watchdog, that he needs to raise taxes or cut spending to meet government targets.

“That’s the worst of all worlds,” Zaranko said. “You don’t want to have to raise taxes pre-election.”

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