It was only a week ago that the suggestion of £30bn in economic support for businesses to get them through the shock induced by the explosion of Covid-19 across Europe raised eyebrows among the more fiscally hawkish elements of the Conservative Party.
Now, just seven days later, the Chancellor has announced £330bn of Treasury-backed loans to businesses, a fiscal injection of a scale never seen in the UK during peacetime. What looked to be a troubling, but limited, case of epidemic disease far from home has rapidly developed into what could be the worst crisis that this generation will ever have to face.
The step change in HMT’s approach is only representative of the wider shock that the coronavirus pandemic is delivering to our way of life – to our culture, to the economy and to our politics. It is hard to think of a singular crisis since the Second World War that has challenged our assumptions about the way this country operates on such a large scale.
Two wider shifts are immediately apparent.
Government has, for the last 40 years, been a very distant entity to many British people. Bar engagement with the emergency services in a time of crisis, HMRC, and the DWP if one needed to draw on social security measures, for most going to see one’s GP or a stay in hospital was the closest they ever got to Government. These services sat in the background to our daily lives, caveated with social understandings of fairness, and reciprocity.
The considerable muscle that Government can bring to bear is about to become incredibly stark to many people, and the usual social understandings of our contractual arrangement with the state could be shattered. No doubt many will say that “they can’t do that” in the weeks to come. People are about to find out that in a crisis, the Government can, and will, do whatever it needs to do to safeguard the common interest.
There is a wider economic reality emerging as well. Since Thatcher sought to roll back the frontiers of the state, and was vindicated by steering the country out of the economic malaise that handicapped the country during the 1970s, the economic orthodoxy among neo-liberal governments of all shades that followed was that the economy could be directed and sustained through monetary policy adjustments supported by a limited, baseline fiscal framework. The system shuddered in 2008, when the mantra of leaving business to prosper, enabled through a regulatory bonfire, left huge structural vulnerabilities in the economy. The response saw interest rates almost eliminated to maintain liquidity and keep the economy ticking over.
It just about worked that time, but it hasn’t worked this time. The Bank of England has slashed rates to 0.25%, and in the US the Fed has them sitting effectively at 0%. It’s not enough to mandate cheap access to credit though when people simply aren’t leaving their homes and engaging in the economy. When a demand shock hits, there is only so many monetary leavers that can be pulled before we end up in a liquidity trap, as we are now, where credit is cheap but there is no-one to sell to. The Government is being forced to resort to fiscal stimulus on a scale not seen since the 1940s to keep businesses alive through this period – the reality is that many of the loans they are guaranteeing will never be paid back.
Effectively, the Treasury is prepared to underwrite large parts of the UK economy, demonstrating that that the monetarist orthodoxy of the last 40 years can only go so far. This is a watershed economic moment that will be the basis for the next phase of our economic debate. After all, why quibble over government intervention in the economy in one sector or another when reality has demonstrated that such debates are only placeholders until a real crisis hits.
Those two wider understandings are likely to reframe the debate once we’re through the immediate crisis. It is usually political concerns that constrain government in the good times (and despite the political polarisation of Brexit, those times were indeed, in hindsight, the good times), and not necessity. When we artificially construct political narratives to debate, over time we lose focus on the real framework that we are operating in and a crisis brings us back down to earth and forces a shift in thinking. Covid-19 is likely to be one of those moments.
In terms of the next few weeks, what changes will we likely see in the political sphere outside of the immediate crisis response?
The largest issue in politics just a month ago was Brexit, and it hasn’t gone away. Whilst the next round of negotiations have now been suspended until May to give the EU and HM Government time to deal with the immediate concerns in front of them, there is no reason why negotiations cannot take place remotely, as most business will have to for the next few months. The law states that Ministers cannot seek an extension to the Transition Period, but given that the Budget was passed without a vote last night, such normal considerations are virtually irrelevant. It would be politically difficult to seek an extension but many may agree that it is prudent. Given the increasing tempo of the Government’s response, if an extension is sought it is likely it will be presented to the public as a matter of course and not the subject of days of laboured debate as it would normally. A decision will likely have to be taken prior to the start of the negotiating round in May, contingent on circumstances at the time.
Secondly, the issue of infrastructure investment was at the forefront of many people’s minds in the run up to the Budget, but the £100bn National Infrastructure Strategy was postponed to build some breathing room for the NHS to cope with Covid-19. However, with the Government taking on huge amounts of debt to provide direct financial assistance to business, the issue of a further £100bn of investment that will generate growth, jobs and stimulate economic activity may just be what the economy needs to wake it up once the pandemic begins to subside. The New Deal that began the process of recovery for the US in the 1930s was largely built around massive, direct infrastructure investment by Government. It is likely that with the usual concerns about fiscal prudence suspended, direct investment will be seen as a palatable form of assistance in the coming months.
Following on from that is concern surrounding the existing national transport infrastructure, with the Chancellor setting out his commitment to a tailored package to bail out the airlines. In recent years the debate has focused on the extent to which government should be involved in running the transport system, given its strategic importance, it may be that they are forced to step in more and more to either bankroll or take over private operators in the coming months. Expect to hear far more about the future of the UK’s transport network at all levels.
This is definitely an extremely serious crisis, but the reason we pay into government, and why it ultimately exists, is to take action in times like this. The national structures are in place to mitigate the immediate threat, as disruptive as it may be, and the task now is to understand and adapt to a political environment that has been turned on its head by the sudden arrival of a real, dangerous crisis.
by James Olney