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Will the economic argument over Covid-19 end the same way as the financial crisis?

Politics is once again becoming an argument over how to respond to a crisis: but the parameters of the debate have shifted.

By Stephen Bush

One consequence of the Covid-19 pandemic in a British context is that it is making politics normal again – at least as far as the fiscal debate is concerned. I’ve written a lot about the coronavirus business interruption loans (Cbils) because I think they’re one of the most important pillars of the government’s economic response; getting support to businesses right is a key part of whether the UK will recover from the economic consequences of fighting coronavirus and how swiftly it will be able to do so.

In my i column this week, I set out how the debate over whether or not to guarantee the loans at 100 per cent (as some Conservative MPs, various business lobbies and the shadow business secretary, Ed Miliband, have been calling for) or to keep the loans at 80 per cent (as Rishi Sunak has done, although he is heavily rumoured to be contemplating a U-turn).

The risk of guaranteeing the loans up to 100 per cent is that it will encourage reckless lending by the banks. Those who think that Sunak should guarantee the loans – a group that includes myself – believe that the problem is that issuing any loan in this environment is reckless lending, and that any measure to prevent that will simply result in businesses not getting the credit they need.

A lot of this sounds very familiar to the arguments that were had between left and right during the financial crisis, because it is. In the i, I wondered if the return to the traditional Conservative-Labour argument about fiscal policy would have the traditional ending: a Labour defeat.

But there are important ways that this fiscal debate is not like the one in 2008-09. The most important difference is that during the financial crisis the Labour Party was split on how to tackle it. Some favoured a significantly more hawkish fiscal position than the one pursued by Gordon Brown.  

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This time it is the Conservative Party, and the right more broadly, that is split. The Devizes MP and former Downing Street aide Danny Kruger argues convincingly on his blog that the bigger risk to the British economy and government finances lies in businesses going bust, rather than in the government’s finances being overstretched. The Adam Smith Institute alumnus Sam Bowman argues well here that the argument to worry about government debt in 2008-09 does not apply as far as the Covid-19 crisis is concerned. In a thoughtful piece for ConservativeHome, Bernard Jenkin makes the case for prolonged and significant government spending and involvement in large areas of public and economic life.

Many more Conservative MPs and right-wing policy wonks are privately of the view that, unlike in 2010, the reasons to be worried about debt do not apply. It is that change of overall climate that Gordon Brown believes makes the argument against austerity easier to land in 2020 than it was in 2010.

Is he right? I think it’s surely a contributing factor that, broadly, the intellectual right was united in believing that the correct fiscal response in 2008-09 was a programme of spending cuts and a smaller state, while the intellectual left was divided. But another is also that the British state was doing a lot in 2009 and, as George Osborne proved, you could cut an awful lot of spending without most voters noticing. The problems of rough sleeping, the pressure on domestic violence centres, and other issues that have made Boris Johnson’s task in responding to the novel coronavirus more difficult were all created in the 2010-15 spending rounds, but it is only half a decade later that the consequences have started to become politically painful.

In 2015, I didn’t think that you could possibly deliver the spending cuts George Osborne envisaged, and it turned out he couldn’t: he had to retreat on his welfare cuts and the resulting fallout from his attempt to introduce them ended his leadership hopes and devastated David Cameron’s approval ratings, which may well have been enough to tip the balance as far as the EU referendum was concerned. The fiscal straitjacket that Cameron passed on to Theresa May was so tight that she essentially had to go for an early election just to get out of it – and discontent with the tight fiscal settlement was one reason why she lost her parliamentary majority in 2017. Boris Johnson was able to win a majority in 2019 partly by promising to turn the spending taps on in education, the police and the NHS.

There just isn’t enough left in the British state to swallow the Covid-19 debts with a further round of spending cuts – nor, in my view, will people tolerate further tax rises merely to maintain the current level of government spending. Even if they can win an intellectual argument for greater austerity, I’m not sure that the Conservative Party’s remaining austerians could govern on that platform even if they wanted to.