In his summer economic update, Rishi Sunak unveiled a series of measures to ease the coronavirus recession. The big economic policy argument after the 2008 financial crisis was whether or not the correct fiscal response was spending cuts; the debate split fairly cleanly on left-right lines. The big economic policy argument at the heart of the latest recession is the extent to which this is primarily an economic policy problem at all, and that doesn’t split so cleanly.
As I wrote this morning, the fundamental cause of our economic problems is the demand shock caused by people voluntarily reducing their social contact at the start of March. That was accelerated by the government deciding to legally mandate a lockdown on 23 March, but thus far – and it is very early days – while people have increased their social and economic contact a little after the ending of many aspects of lockdown, large numbers of people are still opting to observe a much tighter version of the lockdown than legally required.
This has had the knock-on effect of leading households to save, rather than spend, partly because they have less to spend on, but perhaps also because they are concerned about the economy and are trying to protect themselves for a rainy day.
The big question is: how much could Sunak have done about that? I don’t mean that in terms of amounts spent – I mean: is this fundamentally a problem that government spending can directly fix?
His mini-budget is, fundamentally, a big bet that it can: a 50 per cent discount on meals out from Monday to Wednesday in August (capped at a value of £10 per head), a stamp duty tax cut for homes valued under £500,000, and most importantly of all, a six-month job placement scheme for 18- to 24-year-olds, and a £9bn fund to pay employers £1,000 for every furloughed worker they keep on until January.
This is the economic equivalent of running alongside a child on a bike and then letting them go after a discreet period: time it right and you’ve taught your kid how to ride a bike; time it wrong and the child falls off the bicycle or drives into a tree. Sunak’s big bet is that these measures will cause people to go out and resume their normal economic activity – and that by January the remaining job retention measures can all simply fall away.
The quibbling about the size of Sunak’s stimulus measures, I think, misses the point. Put bluntly, either you can achieve an economic lift-off by partially reopening the economy and having a few nudges here and there to resume normal economic activity, or the message of “go out and eat – by the way, Conservative Party conference is happening online, please don’t get within a metre of too many people, or celebrate a goal with strangers” spooks people and there is no return to normal levels of economic spending.
One big risk of Sunak’s approach is that it is too soon for economic stimulus; that without a greater level of reassurance that the danger has passed, people simply won’t take up the dining out discount, that pubs and restaurants continue to trade at reduced capacity, and that households continue to save rather than spend.
But the other big risk concerns the other major economic decision coming down the track: the shape of any trade deal the United Kingdom reaches with the European Union at the end of the year, and the economic consequences flowing from that.