This has been a big week for economic policy. Faced with the prospect of their economies grinding to a halt in the face of measures to reduce the spread of coronavirus—not to mention the immediate reality of financial markets in freefall—central banks and governments around the world have been busy announcing support packages. These efforts are obviously a distant second priority to the job of protecting the population from infection and treating the sick. But if this turns into a full-blown economic crisis too, then this will deepen the misery coronavirus causes, with those on lower incomes most vulnerable.
So, how have they done?
First, both the new chancellor, Rishi Sunak, and the Bank of England announced support for the overall economy. The Bank got the ball rolling at 7am by announcing an emergency cut in its policy rate on the morning of Budget day, from 0.75 per cent to 0.25 per cent. This was the first unscheduled rate cut since the financial crisis, taking rates back to their all-time lowest levels. And the chancellor announced a £12bn package which, when combined with additional spending announced last September, amounted to £30bn of extra spending this year.
The new funding included an extra £6.7bn towards health services, and Sunak promised that “whatever extra resources our NHS needs… it will get.” Whether this will prove to be enough will ultimately be down to the extent of the spread of the virus. And it may be that the big problem for the NHS will be staff shortages rather than a lack of financial resources.
Even so, this substantial and timely support is most welcome. Some commentators have criticised rate cuts as ineffective in the face of the specific threat from coronavirus. But such a policy will make it cheaper for firms and households to borrow to get through the tough time ahead, and so reduce the risk that the temporary effects of the virus end up becoming permanent.
But it’s true that rate cuts aren’t targeted enough to help those families and businesses most affected by the outbreak—so the next part of the policy response was more targeted measures to help them.
In this context there were a lot of announcements. The government announced £5bn in support for firms, aimed at stopping the temporary virus disruption leading to them laying off workers, or even closing permanently. Bigger-than-expected measures to allow small and medium-sized firms to reclaim the costs of coronavirus-related sick pay were combined with direct grants to small businesses of £3,000, and an 80 per cent state guarantee for loans. This was reinforced by the announcement of a Bank of England scheme designed to keep commercial banks lending to smaller businesses.
By contrast, the government announced just £1bn in support for working families. There was welcome action to allow people to claim Employment and Support Allowance immediately upon falling ill, helping some self-employed workers. But the government failed to extend Statutory Sick Pay to two million low earners, leaving them reliant on less generous Universal Credit. Nor was there a move to raise the rate of sick pay. Many workers not entitled to occupational sick pay face income falls of between two-thirds and three-quarters if they are forced to self-isolate or fall ill. The chancellor should revisit this.
While steps to support those on lower incomes were disappointing, the UK’s swift action stands out when compared to what is going on in other countries.
In the US, the Federal Reserve—like the Bank of England—announced an emergency interest rate cut of half a percentage point. But this has not been reinforced by fiscal measures. The response from the US government has been poorly timed, much less targeted, and in some cases has led to a loss of confidence.
In Europe, the European Central Bank (ECB) has no room to cut interest rates—so its response has focussed on measures to support the financial system. Indeed, ECB President Christine Lagarde called for “an ambitious and coordinated fiscal policy response.” But, to date, the response from eurozone governments has fallen short of this ambition. While some countries—such as Italy and Ireland—have taken steps to support the economy, many others have done very little, leaving the fiscal measures in mainland Europe looking disjointed.
This week has served to illustrate the strength of the UK’s economic policy framework: the coordinated, timely and targeted nature of the announcements from the government and independent Bank of England should be commended, especially when compared to what we have seen elsewhere.
But with the extent of economic disruption depending on the eventual spread of the virus, the outcome is inherently unknowable and could, ultimately, be very severe. This means that measures taken this week may not be enough in the event of a major virus outbreak. If this happens, the chancellor will need to be ready to provide more fiscal support, because monetary policy is close to its limits, with policy rates close to zero and long-term interest rates at all-time lows.
Now is the time to start planning for what might come next.
By James Smith, Head of Macroeconomic Policy, Resolution Foundation