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Government deserves credit for reducing the economic costs of coronavirus lockdown

Well-designed restrictions and clear communication were able to reduce the extent of any trade-off between public health and the economy

Recent figures suggest that the economy fared much better during the November lockdown than in the spring. Thomas Pope says well-designed restrictions and clear communication were able to reduce the extent of any trade-off between public health and the economy

One of the biggest challenges to policymakers throughout the Covid crisis has been managing the perceived trade-off between minimising the harmful public health impact of Covid-19 and minimising other forms of economic and social harm.

While Germany and several east Asian countries have achieved the best health outcomes and had less severe economic contractions, the UK government has an unenviable record on both fronts. Awareness of the huge economic impact of tightening restrictions is one of the reasons it was slow to bring in tougher rules in the autumn.

Its key challenge for the second lockdown was to change behaviour enough to reduce infections while trying to minimise economic and other harms. Early signs suggest it has succeeded.

Far fewer people are being furloughed than in the first lockdown

The government’s coronavirus job retention (or furlough) scheme was paying the wages of 8.9m employees at its peak in the spring, during the first lockdown. This had fallen to 2.5m by the end of September after public health restrictions were lifted and many businesses were able to reopen.

New data from the Office for National Statistics (ONS), covering the central two weeks of the second lockdown, suggest that only 4.5m people were furloughed, well below the levels seen in the spring. These figures are based on a survey of businesses, rather than administrative records (which are not yet available), but should give an accurate early indication of furlough numbers.

In most sectors surveyed, businesses have not put any additional staff onto furlough since the start of the second lockdown. In the construction sector, nearly half of workers were furloughed in April as workers obeyed the ‘stay at home’ instruction, but this had fallen to just 3% by the end of September and appears to have remained at this level in November. Even sectors that were directly affected by the tighter restrictions in November – arts and recreation, hospitality, and retail – have furloughed many fewer people than in the spring. Furlough numbers are well below the 6m predicted by the OBR. [1]

Recent figures from the ONS also suggest the second lockdown had a much smaller impact on employment than the first. The number of employees fell by just 30,000 between October and November – compared to the disappearance of nearly 600,000 jobs between March and May.

This is because businesses and government have been better prepared

Both businesses and government were better prepared the second time round, with many fewer businesses closing during the second lockdown. Businesses now know that work can continue in sectors not directly affected by restrictions – unlike in April, where a lack of clarity led to high furlough rates in manufacturing and construction.

Businesses have also worked out how to function under the new restrictions, with more pubs and restaurants offering takeaway service and shops creating or expanding online retail business. Just under half (45%) of businesses in food and accommodation stayed open in November, for example, more than twice the number of businesses open as in April.

Importantly, this continuing economic activity has not prevented the public health message from working. According to the latest data, the second lockdown caused infections to fall in all regions of England, although there has been an uptick in cases in London and the east of England since it ended. [3]

This is good news for the economy and the Exchequer

The OBR estimated that the extension of the furlough scheme to cover November 2020 to March 2021 would cost £20bn. If the numbers furloughed are more than a million lower than anticipated (under 5m, rather than the 6m predicted by the OBR) this could save the chancellor £1bn in November and more throughout the winter. This makes it cheaper, and possibly more likely, for Rishi Sunak to continue support until a vaccine is fully rolled out.

More importantly, it suggests economic activity has been nowhere near as suppressed in the autumn as in the spring. The share of businesses that were closed in November was the same as in July and well above the trough of the spring. The OBR expects GDP to fall 2.7% in the last quarter of 2020, largely driven by a loss of output during November – but this dip will be significantly smaller than the 20% fall in output in the spring, and the furlough scheme data suggests it might be even smaller than the OBR predicted.

The economic and employment figures suggest that the govenment learned lessons during the first lockdown, and show how effective policy design and clearer communication can mitigate the trade off between public health and economic considerations. However, with cases on the rise again in some areas and fears of a post-Christmas spike, tighter restrictions may need to be introduced in the new year and with them an adjustment of government policy to maintain a fine balance between health and economic costs.

 
Administration
Johnson government
Publisher
Institute for Government

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