On 31 January, when the United Kingdom left the European Union and the country’s first Covid-19 cases were confirmed, Conservatives prepared for a new decade of prosperity and, indeed, hegemony. It did not take long for their illusions to be dispelled. The UK would soon enter the worst economic recession since 1706.
Britain’s GDP has to date shrunk by 25 per cent, returning the economy to the same size as in 2002. The national debt has surpassed 100 per cent – the equivalent of the economy’s entire annual output – for the first time since 1963. According to the Office for Budget Responsibility, unemployment is forecast to rise to as high as four million people (10 per cent).
Faced with the health threat posed by Covid-19, the government’s response was slow and haphazard. Its response to the economic crisis, by contrast, was swift and decisive. Unlike in 2008, when David Cameron’s Conservatives opposed the fiscal stimulus introduced by Gordon Brown, the Chancellor, Rishi Sunak, intervened to underwrite jobs and living standards. This enlightened approach has to date helped protect 9.2 million jobs, through the government’s furlough scheme, preventing a spike in unemployment of the kind seen in the US (where joblessness stands at 13.3 per cent).
Owing to such intervention and the collapse in growth, borrowing in 2020 is forecast to reach £298.4bn – the largest deficit since the Second World War. But though borrowing has seldom been higher, it has also rarely been cheaper. Indeed, such is the demand for UK debt from investors that the government has for the first time sold bonds at negative interest rates: in times of economic crisis, there are few safer havens than UK bonds. Unlike the eurozone countries, Britain retains its own currency and its own lender of last resort, the Bank of England, which saved the government from insolvency at the height of the present crisis.
Yet such fiscal freedom has not prevented demands for renewed austerity. George Osborne, author of the 2010 spending cuts programme, has warned of the need for a future “period of retrenchment”. Mr Sunak was reported by the Financial Times to be preparing a programme of tax rises and spending cuts for the autumn (though renewed austerity was reportedly rejected this week by Dominic Cummings in a briefing to special advisers).
In our view, it would be reckless to repeat the austerity programme that did such damage to the social fabric of Britain. The priority for the government should not be rushing to “balance the books” but protecting jobs once the furlough scheme ends in October. As the experience of the 1980s demonstrated, the long-term economic and social consequences of mass unemployment are debilitating. The best means of sustained debt reduction is growth (to maximise tax revenue) and moderate inflation (to reduce the cost of servicing debt). After the Second World War, the national debt peaked at 258 per cent of GDP, but it was steadily eroded through a “golden age” of expansion, falling to 45 per cent by 1973.
Though the UK is forecast to suffer the biggest recession of any developed economy, it is also predicted to enjoy the fastest recovery. But merely rebooting Britain’s pre-existing economic model is inadequate; the government must use this moment to create a new one.
The UK’s economy is too unbalanced, too unproductive and too unequal. Even before the pandemic, average real wages remained below their 2008 level. Productivity (output per hour), meanwhile, was 13 per cent below the G7 average.
The economy will not be transformed through the chimerical pursuit of lucrative trade deals with the Anglosphere. Rather, what is required is infrastructure investment, further devolution and the development of a more resilient state. The 2008 crisis should have led to an economic transformation, but instead, as the public realm was subjected to austerity, a zombie order prevailed. Now, for the second time in little over a decade, the state has been forced to intervene to save the economy from ruin. The government should not waste the opportunity this crisis offers for lasting transformation.
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This article appears in the 24 Jun 2020 issue of the New Statesman, Political football