There’s a tough economic road ahead

It’ll take more than tinkering to get us out of our current sorry state

March 26, 2021
With coronavirus throwing inequalities into stark relief, political leaders must show ambition © © MIKE ROBINSON/ALAMY STOCK PHOTO
With coronavirus throwing inequalities into stark relief, political leaders must show ambition © © MIKE ROBINSON/ALAMY STOCK PHOTO

In his sombre reflections from exile, The World of Yesterday, Stefan Zweig pointed out how difficult most people find it to appreciate that some events are so cataclysmic there is no going back to life as it was before. The hope is that things will return to normal, that necessary adjustments will be incremental. This was not the case after either world war. Nor, after a global pandemic killing over two million people and the worst recession for decades, if not centuries, does it seem likely that tweaks will be enough today. But although radical changes are needed, and probably inevitable, tweaks will be tempting.

It was surprising that the global financial crisis of 2008-2009 did not lead to more systemic economic reforms. Politicians and regulators opted for modest rather than radical reform of the financial system; governments generally chose austerity over politically difficult tax increases. Combined with quantitative easing, this meant that the poorest bore the financial burden of bank bailouts, while the richest benefited from rising asset markets. Middle incomes stagnated, low incomes fell, and populism flourished.

“The public appetite is not so much for ‘building back’ as it is for ‘better’”

In the years ahead, governments will face two challenges, short and long term. In 2021 the priority will be restoring some economic growth and trying to limit the rise in unemployment. The education deficit of a year or more will need to be remedied. The Treasury will need to figure out which businesses are going to fail without repaying their government loans, how accumulated debts to landlords are going to be resolved, and where still more government funding can rescue sectors like the arts or the airlines if they are viable longer term. The inevitable (and widely predicted) costs of Brexit will make this recovery phase all the harder. 

While tackling the immediate problems, though, ministers and officials need to be thinking about the shape of the economy longer term. The pandemic has exposed the weak spots of all the societies it has swept across. In the UK, the combined inequalities of precarious jobs, poor housing, and poverty- and environment-related ill-health have contributed to the high death rate and its unequal incidence. The progressive under-funding of the NHS and state schools in areas of high need is all too evident. Essential broadband access is far from universal. The country’s uneven economic geography, inspiring the “levelling up” ambition that helped get the government elected, has worsened.

In short, the UK finds itself in a deep economic hole, after decades’ worth of under-investment in physical and social infrastructure, with a welfare state failing to safeguard people from food banks, homelessness and destitution, and politically unsustainable inequality.

Clambering out of the hole will require government spending. The private sector will need more confidence about the future before business starts to invest again. But more important will be a sense of national purpose. Think tanks and academics can come up with good ideas but only political leaders can inspire a broadly shared sense of direction and optimism that things can get better. Where is today’s equivalent of the Beveridge Report, or the bold post-war plans to ensure universal healthcare and better education? Where is the vision for investing in a productive economy, bringing wide benefits to the population?

Is “levelling up” a serious intention? If so, it will require something very different in scale of ambition from the policies that successive governments have been trying for decades. Political leaders of any party will need to start specifying what they mean by it, what they would change compared with business as usual, and how much they would commit to achieve it. 

What does it mean to pledge a green recovery? Small investments in new battery technologies will not deliver climate targets; how are the big behavioural changes needed going to come about? How much is the government going to invest in new infrastructure? Will it ban housebuilding on flood plains and override nimby-ism to enable homes to be built elsewhere? 

Above all, this is exactly the moment to embark on a path toward long-term prosperity by setting out a bold, positive vision of the future. Optimism can influence people’s actions in such a way as to become self-fulfilling. A narrative aligns individual business or personal decisions in a common direction. Boldness combined with the sense of deep crisis enables the usual frictions of difficult policy change to be overcome. 

The cliché is that a crisis should never be wasted. The opportunity presented by 2008-2009 crisis was indeed wasted, so we entered the current Covid-19 plus Brexit recession in a sorry state. The public appetite is not so much for “building back” as it is for “better” at this fork in the road. It is not at all obvious though that the UK’s collective leadership will respond with anything more than short-term patches.

This article is featured in Prospect’s new “The Road to Recovery” report, published in partnership with Lloyds Banking Group, the Government of Jersey and Jersey Finance. Read the full report PDF here.