In the face of Covid-19, the Government is right to take action that in ordinary circumstances would not be acceptable. Businesses collapsing in an ordinary recession is an important aspect of how markets transfer resources and create more efficient enterprise and innovation. But businesses in trouble because of coronavirus may be viable and losing them could be wasteful.
It is some comfort though that – excepting trains – the Government has steered clear of mass nationalisations and sector-specific bailouts. Similarly, the Chancellor is correct to encourage firms to exhaust all available options before offering any kind of direct taxpayer support. Many FTSE 100 firms’ cash piles were looking healthy last year, and non-payment of dividends in upcoming quarters also seems a reasonable course of action for many companies.
Of course, if the Government legislates for mass closures, then recompense for individuals and businesses is acceptable. But the dip that we’re currently in is supply-side led. Encouraging consumer spending at this particular juncture is actively counter-productive and endangers the stringent public health measures currently in place.
A clear path from the crisis rut needs to be worked out now and that means encouraging consumer spending and investment at the right time. The circumstances of the 2008 financial crisis and today’s predicament are entirely separate. But looking at the UK policy response to the former, it shows that a timid approach was not worthwhile. The cut in VAT from 17.5% to 15% was ineffective in stimulating consumer spending, not least because the reduction was also ‘paid for’ with an increase in alcohol, tobacco and fuel duties. The recovery was slow, stilted and unevenly distributed.
Though it now seems an age ago, the Government was until recently talking up its “levelling up” agenda. The policy decisions in March’s budget would mean an additional £175 billion on capital projects alone over the next five years, with national account taxes rising every year this parliament. And those forecasts don’t include any of the spending related to Covid-19. Government net debt will exceed £2 trillion this financial year, and even go over 100% of GDP for a time. Spending decisions that were made before the pandemic need more scrutiny when this crisis is over.
The magnitude of where we are today – and where we’ll likely be in a few months’ time – should not be underestimated. The Debt Management Office at the end of March said they would be issuing £45 billion of gilts in April. By way of comparison, planned sales of gilts for the whole of 2019-20 amounted to £118 billion. And this is on top of the Bank of England putting a further £200 billion into the asset purchase facility, as well as allowing direct borrowing by the Government via the ways and means facility.
A further concern, then, is that this vast expansion of the state becomes politically and operationally difficult to wind down. Some well-chosen measures will be needed to do just that.
On the spending side, there are obvious targets like the cancellation of HS2, in spite of the recent and tin-eared decision to issue the notice to proceed. Likewise, substantial portions of the aid budget must be redirected to fighting the virus, to help pay to cover some of the clear strain on the NHS and social care. Local authorities should also eliminate non-statutory and low-level spending to free up cash for public health efforts.
When we are past this crisis and the need for economic recovery comes clearly into view, it could also be the time for some decisive tax cuts. As polling from the Adam Smith Institute this week shows, almost three quarters of voters favour tax cuts to boost growth and jobs.
How might we go about it? One option is to suspend all national insurance payments for a short period of time, either during the summer or autumn. To do that for one month would save all workers – full-time, part-time and the self-employed – over £12 billion. When the Government somewhat whimsically announced the elimination of £13.4 billion in (some) NHS debt, such a figure does not seem so unreasonable. Similarly, a reduction in fuel duty would have the twin benefit of lowering the cost of the near two-thirds of journeys undertaken by car, and aid social distancing.
The Government is understandably being driven by the evidence from public health staff as to the best course of action. The length of the lockdown and how it will be lifted is still unknown. But to avoid the risk of a non-artificial flattening of demand after the quarantine measures conclude, bold actions need to be considered immediately. Cutting and temporarily eliminating some of these taxes, and removing as much non-essential spending as possible, should be given serious consideration for when the time comes.
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