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The economic consequences of coronavirus go way beyond short-term fixes

The coronavirus outbreak means an immediate economic test for the government, and in the long-term could mean a major re-evaluation in what the public

The coronavirus outbreak means an immediate economic test for the government – and in the long-term could mean a major re-evaluation in what the public demands from the state, says Bronwen Maddox.

The minute that Boris Johnson stood up on Monday and told people to stay out of bars and clubs and to begin distancing themselves from friends, family and colleagues, it became essential that the next statement from the government was about its economic response and help for businesses.  

That is not to say it is trading off the economic hit against health. Sir Patrick Vallance, the chief scientific officer, has said throughout that the government’s aim is to minimise deaths. But when the government is eventually judged on its handling of the crisis, it will be on three fronts. The first is whether – in a way that cannot be quantified but still may prove to be the most important – it has seemed to have been in control of its planning and strategy. The second will be on the impact on health – bluntly, the number of deaths compared to other affluent countries. And the third will be the steps it took to mitigate the enormous hit to businesses, the economy and all those personally hit by the sudden cessation of normal life.  

Rishi Sunak has taken correct steps to support the economy but questions remain unanswered

Hence the chancellor’s emergency rescue package on Tuesday. With £20bn of extra public spending and a further £330bn (or 15% of GDP) in government loan guarantees, it was far more wide-ranging than the £12bn of support announced in his budget just six days earlier. Rarely has a budget been made irrelevant so fast, certainly not one widely regarded as successful and with many popular elements – not least, an increase in spending that was just a week ago regarded as high.  

It would seem harsh to judge the government by whether there is a recession. With much normal activity shut down, it is almost inevitable the economy will shrink. Nor can it rely on traditional fiscal stimulus, much of which encourages people to spend. Instead the government has just told people not to do many of the things they would usually do in spending their money (online shopping aside – but people’s fear about their future income may inhibit that).  

The focus is therefore on measures to support businesses. The IfG has written in the past on how the government should consider conditions for support, for example, in the case of no-deal Brexit. In theory, Covid-19 is a temporary shock for many businesses, albeit a very sudden and sharp one. Restaurants and bars have gone almost overnight from what was beginning to feel to some of them like a boom to the spectacle of completely deserted venues. There are therefore not the customary concerns about moral hazard – that is, encouraging businesses to rely on government support – or about pouring money into a bottomless pit.  

It is possible that some businesses may never see their custom fully return, if people’s habits permanently change. But given the immediate impact, the government has done the right thing in offering widespread support. It still needs to address the question of supporting individuals – including those working in the most affected sectors (whose jobs may still be at risk, despite the support offered to businesses), the self-employed, and those in rented accommodation. Rishi Sunak said the government would “strengthen our support for… individuals” but the policies announced so far are limited. It is entirely plausible that the chancellor will be making more announcements of support again soon.  

The government should be wary of risking a further economic hit from Brexit during this crisis

We have written about the growing pressure on the government to relax its insistence on keeping to the deadline of ending the transition period at the end of the year. That pressure will only grow. Michael Gove, in effect Johnson’s deputy, has declined to publish the government’s economic assessments of the impact – but the widespread expectation is that, even before coronavirus, they showed a hit to growth. It would be rash for a government to add a second economic hit on top of the current one.  

The coronavirus crisis could help future governments to make the case for raising taxes

The government’s support for the NHS and social care is already coming under intense scrutiny. Much of the extra money it had allocated will be consumed by the current crisis. It was also clear that Sunak’s budget frontloaded the spending, with questions about whether more was to come in the final years of the government’s term. It is very possible that this episode establishes firmly a public desire for much more spending on health and social care – and much more acceptance of the higher taxes that might imply. In that case, the jump to a future of higher taxes, which many analysts have long been predicting as the only answer to the health funding problem in an ageing society, could happen much more quickly. The current crisis would have overcome the political problem of raising taxes to that end that has defeated so many governments. 

Economy Tax
Institute for Government

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