Covid Fallout – The difficult decisions on the economy to come
By TruePublica: It was Lenin who once wrote that “There are decades where nothing happens and there are weeks where decades happen”. In the time span of just eight weeks, Britain formally left the European Union and was facing an economic GDP decline that most economists agreed would be about 5 per cent a year over a decade. On the other side of the pond, the American president was being impeached in a period of the longest sustained stock market growth in its history. On the other side of the world, Australia was facing a $100bn bill for its bushfires and next to the EU, President Putin followed president XiJinping in granting himself presidential power for another 16 years. So much was going on.
But now, it all seems a lifetime away. Even Chancellor Rishi Sunak’s first Budget on March 11, just three weeks ago, which was being dissected and picked over for typical Tory traps, feels an age away and somewhat insignificant. In the last ten days, the public finance landscape has changed beyond all recognition from the previous ten. The Covid-19 pandemic is, of course, first and foremost a public health crisis, but its fiscal consequences will continue to make itself felt for years. Unfortunately, it is more likely to linger for a decade or more.
The outbreak, and response to it, has led to a sharp economic downturn never experienced in Britain’s long history. Even before considering the substantial fiscal package that the government has committed to mitigating its impact, this will depress government revenues and increase spending substantailly. Morgan Stanley optimistically forecast (March 23) that the UK economy will contract by 5% this year due to the impact of the pandemic, which would leave it more than 6% smaller than forecast in the Budget two weeks ago. This estimate is predicated on a “robust” rebound in the second half of this year. That is highly unlikely given the sheer scale of people, as yet unknown, who will have lost their jobs amid escalating business failures. The OECD followed that up with a forecast just two days ago that predicted UK GDP will drop a whopping 25 per cent.
In the space of ten days from 15th March to 25th March, nearly half a million new claims for Universal Credit was made – suggesting layoffs will be greater than the government had anticipated. The cost to the treasury is not known and as yet can’t be forecasted. The Department for Work and Pensions is set up to manage and yet struggles to process 6,500 claims a day – not 53,000 a day.
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The fiscal response to Covid-19 is greater than the response was to the financial crisis in 2008 and subsequent years it inflicted upon civil society
Leaving aside huge tax revenue falls from lost company profits, earnings and overall spending, equity prices have fallen sharply, which can be expected to depress revenue from stamp duty on shares, capital gains tax and even inheritance tax. A further knock-on effect will follow as city bonuses, and withdrawals from accumulated defined contribution pension pots, are depressed.
The IFS predicted just a week ago that Government borrowing is likely to jump £100bn this fiscal year. The reality is already almost double that.
In addition, the government has committed to offering £266bn of support to the self-employed and £330bn in loan guarantees. VAT deferrals will likely cost around £30-40billion before the year year-end.
The point to be made here is that by totting up this lot – the fiscal response to Covid-19 is greater than the response was to the financial crisis in 2008 and subsequent years it inflicted upon civil society.
The Institute of Fiscal Studies says in its most recent forecast of the current crisis that – “Before the impact of the pandemic, the Office for Budget Responsibility forecast borrowing to be £55 billion, or 2.4 per cent of national income in the coming financial year. The full scale of both the economic impact of the Covid-19 pandemic and the policy response to it will only become clear over time. But based on the information we have now, it would not be surprising if they were to triple the amount forecast just weeks ago and push borrowing up to £177 billion or 8% of national income. This would be more than 2008–09. There is a substantial chance that borrowing will turn out considerably more than this if the economic hit is greater or a large fraction of private-sector employers take advantage of the employment retention scheme.”
And the point being made here is that the hit to Britain’s economy goes up whether people keep their jobs or not. Money has been lost, debt has appeared in its place.
Going back to Rishi Sunak’s budget announcement – will the government now continue with its ‘levelling up’ programme, will HS2 be seen as that important as saving household from debt implosion – or indeed, can the country even face the prospect of further financial pressures due to Brexit? The rather charitable OECD forecast for Brexit was a shrinking of the economy by 3 per cent or £2200 per household per year.
Make no mistake some difficult decisions will have to be made quite soon. After printing hundreds of billions to protect the economy and households from going bust – inflation will be threatening us in the months that follow. That means lower standards of living if wages are suppressed as they were during the recent austerity decade. And just how long will the government continue to support businesses and their employees before they turn the taps off? And when they do, how quickly? Over the last decade, the Tory government has manufactured a welfare system that is one of the most meagre in the Western world but with swathes of the middle class turning up to job centres, there’s little chance they will put up with excuses about delayed payments and messing around by a largely failed Universal Credit system.
A new form of austerity is coming or elevated debt at huge cost to the public is now a certainty. They will have to sell it to us again like they did in 2008. Somehow the debt pile is going to have to be repaid, over what time period, by how much and by who remains to be seen.