Even as the coronavirus pandemic struck, the UK economy had barely recovered from the last recession. Average real wages have once more fallen below their 2008 peak. A decade of austerity, including the least generous NHS spending settlement in history, had enfeebled the public realm, and in-work poverty stood at a near-record high.
But Britain must now contend with a still worse economic cataclysm. The Office for Budget Responsibility last week forecast that GDP could shrink by 35 per cent in the second quarter of this year, that unemployment could rise by two million to 3.4 million (10 per cent), and that the national debt could exceed 100 per cent of GDP if the lockdown continues for three months.
The only problem economists have raised with the OBR’s model is that it might be too optimistic. While it has forecast the deepest recession for a century, the independent body also projected the fastest recovery for 300 years, with growth of 25 per cent in the third quarter and 20 per cent in the final quarter. There are reasons, to put it mildly, to be sceptical of this model.
Andrew Bailey, the governor of the Bank of England, gave a frank warning on Friday that “the level of unemployment and the level of business failure” had the potential not only to damage the economy for long-term “scarring effects” to be felt. “Not everything,” he warned, “will come back”.
The known unknowns include the economic performance of China (where GDP has shrunk for the first time since 1976), the reduction in foreign trade, and the risk of a second wave of new or even repeat infections (in South Korea, more than 160 people who had been infected, tested negative twice and been discharged have once more tested positive for Covid-19).
For these reasons, it is imperative that the government minimises the initial damage to the economy. This, some claim, is an argument for rapidly or immediately ending the lockdown. But without adequate testing capacity, this risks a calamitous rise in infection and death rates, and an economically harmful U-turn.
To date, while the government has been excoriated for its handling of the pandemic, its economic response has attracted praise, including from trade unions. In 2008, under David Cameron and George Osborne, the Conservatives opposed the fiscal stimulus introduced by the government, before ushering in an “age of austerity”. By contrast, in his first Budget, on 11 March, Rishi Sunak announced emergency economic support of £30bn, adopting the mantra of Gordon Brown and Mario Draghi, the former president of the European Central Bank: “Whatever it takes.”
But is the Chancellor truly honouring this pledge? On 17 March, he announced £330bn of state-backed loans for businesses and £20bn of tax breaks and government grants. He later announced that the state would pay 80 per cent of the wages of temporarily laid-off workers (up to a maximum of £2,500 a month) and increased welfare spending by £7bn (including a £1,000 rise in annual Universal Credit payments), taking benefits to their highest real-terms level after years of cuts.
This suite of measures, however, was always less impressive than some of the laudatory headlines suggested. The Job Retention Scheme, for instance (which went live today), does not require firms to avoid redundancies (unlike its Danish and French equivalents) and some eligible employers have duly laid off workers.
Universal Credit claimants (of which there are now an additional 1.4 million) still have to wait five weeks before receiving their first payment, and the welfare system is still significantly less generous than its European counterparts. As I recently noted, in the Netherlands, citizens are paid 70 per cent of their previous salary for a maximum of 38 months (75 per cent for the first two), in Germany they receive 60-67 per cent of their salary for a maximum of 24 months, and in France they are paid 57 per cent of their salary for 24-36 months.
Some businesses, meanwhile, have struggled to meet the criteria for government loans (most notably a guarantee that they will be able to repay them). Figures last week showed that only 6,000 loans (£1.1bn) had been issued, compared with 100,000 loans under the equivalent Swiss scheme, although lending has since risen dramatically.
The problem is not hard to discern: at present the government only guarantees 80 per cent of the value of the bank loans. Sunak reportedly fears that increasing this offer to 100 per cent would create “moral hazard” – financial risks without consequences – and would increase “fraud from criminals or abuse from companies that were already unviable before coronavirus”.
But critics such as Ed Miliband, now shadow business secretary, contend that the economic hazard of allowing companies to fail is greater. Mindful of this, some now argue that the government should replace the offer of loans with that of grants. “It’s an issue that will come on to the agenda more,” Bailey observed. “For large firms it is equity in a more conventional sense. For small firms, it is probably more into the world of grants.”
After a decade of austerity, it is hard for some to conceive of the state spending at this level. The Job Retention Scheme alone is expected to cost £30-40bn. But the government has tools at its disposal: progressive tax rises on the wealthy, and new money creation through the Bank of England.
As the experience of the 1980s – when unemployment exceeded three million – demonstrated, the long-term cost of joblessness to individuals and the state is immense. Ever since, the UK has been one of the most unequal and regionally unbalanced economies in Europe, with an abundance of social problems: mental ill health, educational failure, obesity and drug addiction. Though the cost of intervention is great, the government would do well to remember that the cost of inaction may be even greater.