George Osborne’s Treasury could have done more to prepare for the pandemic

At the time of George Osbourne's tenure, a pandemic was one of the most significant risks on the National Risk Register. So it was surprising to hear his forthright defence of his record on risk management at a hearing of the inquiry on Tuesday. That defence centred on the role of deficit reduction in improving the UK’s ability to respond to shocks, claims that health experts did not warn the Treasury that prolonged lockdowns were a possibility during earlier pandemic preparedness efforts, and a rejection of research demonstrating the negative effects of spending cuts on the resilience of the health system in the 2010s.

The Treasury – and rest of government – must improve how it prepares for extreme risks

Much of the hearing focussed on the preparation for a pandemic within the Treasury. As documented in recent IfG research, and in evidence gathered by the inquiry team, the answer was essentially ‘none’ (as it is for many other departments). Osborne said it was only obvious with hindsight that more should be done – but the risk register’s emphasis on a pandemic undermines this claim.

He said the Treasury did not undertake substantial preparations partly because the health department ‘owned’ the risk, and partly because the risk register featured pandemic influenza, less contagious than a coronavirus and so not expected to necessitate the kinds of economic shutdowns seen in 2020 and 2021. It assumed a 3% GDP fall from a flu pandemic and judged that no additional policy and analytical tools were required.

But even if only planning for a flu pandemic, a basic literature review would have shown that the economic effects could be extreme. One 2010 study showed a severe flu pandemic leading to a quarterly fall in GDP of 29.5% (higher than the 21% fall Covid produced), driven by employee absences and falls in demand over several months. ¹¹ https://ora.ox.ac.uk/objects/uuid:6b6a8cd3-cd7d-42f0-991c-5945a47693eb Similar analysis can be found in a report by the US Congressional Budget Office. ¹² https://www.cbo.gov/publication/17544

Lessons could also be found in history: the 1918 or ‘Spanish’ Flu did not lead to centrally imposed lockdowns, but did lead to macroeconomic impacts of a similar order of magnitude to Covid due to the enforced closure of schools, shops, theatres; and the natural response of individuals to stay at home (and therefore not spend money).

The Treasury did not devote enough resource to considering the full range of possible outcomes. This appears to be because it took the scenario of a mild flu pandemic constructed by the health department as given, not considering reasonable worst case scenarios (best practice in any risk management). But this passivity is not an excuse for a lack of preparation, particularly when considering that the Treasury did not seem to be interested in involving itself in central discussions or considering possible ‘tail risks’, providing no or little input into the government’s two pandemic preparedness exercises.

In future it will need to contribute to a stronger cross-government risk management function alongside the new Cabinet Office resilience directorate, including by deploying its analytical expertise to develop assessments of the economic consequences of a range of risks that are not fundamentally economic in nature and by incentivising departments to prepare for risk through the spending review process.

Deficit reduction is not guaranteed to improve resilience

Osborne argued that his greatest contribution to the UK’s resilience was to help to build fiscal space (that is, reduce government borrowing), which was achieved by cutting – or increasing only slowly – spending on public services. On this point Osborne has the support of the Office for Budget Responsibility. ¹⁵ https://obr.uk/frs/fiscal-risks-report-july-2021/ It is true that debt tends to ratchet up in bad times and governments struggle to reduce it during the good: creating fiscal space for unknown future crises is indeed an important yet thankless task.

But blind pursuit of fiscal space is not a good strategy for management of risk – even those that are unknowable. Public spending restraint means provision of fewer services and/or less spare capacity (more efficiency) in the services that are provided.

The spending cuts pursued over the last 15 years – and efficiency drives in public services that predated the 2010 conservative-led coalition – have tended to deprioritise excess capacity and preparedness. IfG research put to Osborne during the hearing demonstrates that this approach made it much more difficult for health and other services to maintain acceptable standards while managing a crisis during Covid. For example, NHS bed numbers have been falling for decades, more than halving in the last 30 years from 299,000 in 1987/88 to 141,000 in 2019/20: pre-pandemic bed occupancy was already running “dangerously high”. There is also evidence that funding cuts during the 2010s have exacerbated health inequalities through uneven reductions in local authorities’ budgets, which limit their ability to tackle the social determinants of poor health. ¹⁶ https://www.health.org.uk/publications/reports/the-marmot-review-10-years-on

It is clear that building fiscal space does not always and everywhere lead to increased resilience. It has costs – immediately obvious and direct if fiscal space is delivered via tax rises; more indirect and slower to materialise if achieved via spending reductions, and highly dependent on how those cuts are allocated across departments (and then across different types of spending, for instance day-to-day versus capital expenditure).

We have also argued that it may have been possible to make the Treasury’s own crisis response more efficient, thus reducing the amount of fiscal space necessary. Its economic support policies were largely a success thanks to the talent and agility of civil servants working in the department and elsewhere. But it seems likely that, had they been designed over the course of years rather than days they could have been more targeted or less susceptible to fraud and therefore less expensive. The specific recommendations that we have outlined would help the government to respond with greater agility and precision in all manner of future crises, as well as help with day-to-day economic policy making. It was not necessary to have perfect foresight of the pandemic to realise that this work was worthwhile.

Preparations in the early 2010s are of course only part of the story the inquiry is to uncover. But it is clear that the particular deficit reduction strategy pursued under Osborne came with trade-offs – whether the negatives outweigh the positives less so. What it is obvious, however, is that the Treasury was not alone in allocating too little resource to resilience.