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19 August 2020

Why the UK’s economic woes began long before Covid-19

For too many people, this will not feel like a new economic crisis, but a new chapter in one that never ended. 

By George Eaton

On 31 December 2019 – the day that China informed the World Health Organisation of the discovery of a novel coronavirus – the Conservatives eagerly anticipated a new decade of prosperity. After the dour Theresa May years, there was a quasi-cultish belief that Boris Johnson’s ebullience would translate into a mini economic boom in the UK.

Whatever this hope was based on, it was not an economic reality. In the final quarter of 2019, the UK’s GDP failed to grow (0 per cent). Average real wages remained below their 2008 level. In the decade since the financial crisis, the British economy had avoided recession – defined as two consecutive quarters of negative output – but it had never truly recovered. 

Then, in the space of a few months, the UK lost almost 18 years’ worth of economic growth. The 25 per cent fall in GDP between February and April of this year returned the economy to the size it was in mid-2002: when the Labour government was still debating whether Britain should join the euro, when Iain Duncan Smith was Conservative leader, and when Barack Obama had yet to be elected to the US Senate. (Owing to welfare cuts, the poorest households were already no better off in 2018-19 than they were in 2001-02.) 

The recession suffered by the UK is the worst of any G7 member state and of any European country except Spain (GDP declined by 22.1 per cent there in the first half of this year). As the Conservatives emphasise the global context of the economic crisis, they sound like their Labour predecessors in 2008. But now, as then, it is possible to isolate domestic reasons why the UK has fared so poorly. In 2008, the problem was that the banks were under-regulated; in 2020 the problem was an unmanaged pandemic.

At the beginning of the coronavirus crisis, the choice was defined by some commentators as between “saving lives” and “saving the economy”. One reason the UK’s lockdown was imposed so late was ministers’ reluctance to disrupt growth. The Conservatives – “the party of business” – were never comfortable with suspending capitalism. Only when the NHS – the UK’s most revered national institution – appeared in danger of being overwhelmed by patients suffering from Covid-19 did they change course.

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In the event, Britain saved neither lives – it has suffered the highest excess death rate of any European country (more than 65,000) so far – nor the economy. These two objectives, it transpired, were mutually reinforcing. By causing a surge in deaths, the late lockdown helped destroy economic confidence. As consumers and businesses feared for the future, they stopped spending and investing. The stringent measures that were belatedly imposed – and that suppressed growth – endured for longer than in other European countries because the virus had seeded across the country.

For the second time in just over a decade, the state has been forced to act as the guarantor of the economy. As affluent households have saved money, the government has spent it. The national debt has exceeded 100 per cent of GDP for the first time since 1963 (when the postwar debt was still being paid off) and this year’s budget deficit is forecast by the Office for Budget Responsibility to reach £322bn, compared with £153bn in the wake of the financial crisis in 2009-10.  

But Johnson’s government was better prepared for the ideological shape-shifting required than many expected. Long before the Covid-19 crisis, the Conservatives had already abandoned the Osbornite fixation on the deficit as a measure of economic health. Johnson and his chief adviser Dominic Cummings instead embraced a more reactionary Keynesianism: higher public spending for conservative, rather than progressive or socialist, ends.

The grip that austerity once held on the political imagination has been weakened. UK state borrowing has seldom been higher but it has also rarely been cheaper. Such is the demand for British debt from investors that the government has sold bonds at negative interest rates (in other words, investors are paying the government to take their money). Japan, where the national debt has hovered close to 250 per cent of GDP for much of the past decade, has long illustrated the latitude a state can enjoy when borrowing at ultra-low rates in its own currency. 

Yet the intellectual pull of austerity endures. The Chancellor, Rishi Sunak, intends to use his autumn Budget to “right the ship” by announcing potential tax rises and cutting public spending. In his summer statement on 8 July he distanced himself from his Tory predecessors by insisting that he would “never accept unemployment as an unavoidable outcome” (in 1991, the then chancellor Norman Lamont declared that “rising unemployment” was “a price well worth paying” to reduce inflation).

But by ending the furlough scheme, on which as many as 4.5 million jobs remain dependent, Sunak may be forced to do so. The last recession was not defined by mass unemployment – joblessness peaked below its 1980s level at 2.7 million – but the next one might be.

It would be a mistake to speak of Covid-19 ravaging an otherwise healthy economy. Low levels of unemployment have long masked a quiet crisis of underemployment: a lack of adequate or good jobs. Successive governments have vowed to rebalance the economy away from its over-dependence on London and the south-east, and finance and property; none has done so. (Johnson’s government has resorted to the traditional sugar-high of a house price boom by cutting stamp duty.)

Yet for too many people, this will not feel like a new economic crisis, but a new chapter in one that never really ended. 

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