The public finances must be repaired but how to share the burden?by Tim Pitt / April 17, 2020 / Leave a comment
Universal credit claims soaring. Nearly a third of businesses laying off workers. Economists predicting the steepest collapse in GDP on record. Statistic after statistic justifying the unprecedented interventions overseen by the chancellor to deal with the economic impact of Covid-19.
Implementation issues aside, the approach has rightly drawn broad support. Economists and politicians of all persuasions agree the Treasury should throw the kitchen sink at the economy to minimise the permanent damage caused by the lockdown.
Yet throwing caution to the wind short-term shouldn’t mean ignoring the future. The economic impact of this crisis will play out in four phases, with each one influenced by the choices made in the previous ones, culminating in a fierce debate about who pays for it all. Moving through these phases, the current political consensus around the economic response will disintegrate, giving way to battle lines likely to define the terms of the next election. For the Conservatives in particular, uncomfortable ground lies ahead; they must start thinking now about how to navigate it.
The current phase is the most unprecedented: large swathes of the economy put into hibernation, with the government paying businesses to stop operating to limit the virus’ spread. Soon we will move into phase two: slowly rebooting the economy as the lockdown lifts. With consumer confidence and business investment intentions almost certainly still low, the chancellor may need to provide additional support to stimulate demand.
The politics get harder during the third stage as the economy adjusts to the post-Covid-19 reality: supply chains may be transformed; people’s travel and working habits will be different; and the government will want to build the resilience of the private and public sectors to future shocks. Because these will be long-term shifts, the government will need to move from a bailout mentality to letting the economy restructure—with the bankruptcies and job losses this will entail. Difficult enough in normal circumstances; harder still on the back of the mantra of doing “whatever it takes” and the biggest private sector bailout in British history.
The hardest part, however, will be the final phase. Concerns about the public finances shouldn’t constrain the short-term response, and persistently low interest rates mean the…