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Why fear of Covid-19 is the biggest economic challenge

Demonstrating that the virus is under control is more crucial to economic recovery than fiscal stimulus.

By Stephen Bush

How unusual is this recession? That’s the big question that no global government really knows the answer.  

Rishi Sunak will unveil a modest stimulus package in his economic update today – a cut in stamp duty to exempt all homes worth under £500,000 from the tax, £3bn in targeted support for people aged 16-25, and the acceleration of plans to insulate homes in order to meet the United Kingdom’s carbon emissions target and to increase energy efficiency. 

What the plans thus far announced all have in common is that they have a quick and immediate economic impact – home insulation doesn’t require the lengthy planning permission or building processes that the big infrastructure projects Boris Johnson talked of last week do, and nor do the renovations that people tend to embark on after buying a home – and that they are comparatively modest. 

Is that the right strategy? Well, it depends on how applicable the lessons of previous recessions are to this one. If you believe – as I do – that the cause of the downturn is the demand shock caused by people voluntarily observing social distancing and lockdown measures, then there’s a limit to what the government can do with fiscal stimulus. It’s much more important that they demonstrate that the virus is safely under control. A little bit of money to grease the skids of the recovery – and a strengthening of the safety net so that households who are saving because they are concerned about the economy feel relaxed about the spending – ought to be enough, provided the virus is under control and seen to be under control. 

That’s why the decision to hold Conservative Party conference online – however sensible and right it is from a health perspective – may actually be the biggest economic policy decision the Tories take this week, because it is another visible sign that the risks of the novel coronavirus are far from abating.

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