17 March 2020

The economic front: weapons to fight coronavirus


‘I have, myself, full confidence that if all do their duty, if nothing is neglected, and if the best arrangements are made, as they are being made, we shall prove ourselves once again able to defend our Island home, to ride out the storm of war, and to outlive the menace of tyranny, if necessary for years, if necessary alone.’

Not Boris Johnson on self-isolation and coronavirus, but, of course, Sir Winston Churchill during his ‘We shall fight them on the beaches’ speech, made in the wake of Dunkirk, an extraordinary rearguard action which mobilised a nation, even if darker days were to come.

But then, extraordinary times call for extraordinary measures. And if we are to ride out our new storm, if necessary alone, exiled to our homes, then extraordinary measures are called for. And as the Government’s briefing yesterday showed, they are what we are getting.

Yet as the Government’s public health strategy has developed over recent days (some would say changed dramatically), so too must its economic strategy. This is a virus we can eventually beat ‘on the beaches’ with a vaccine, but that will be of little use if the land we liberate is rendered barren.

Because that is what is potentially at stake here. Given that lockdown could last, in some form, up to 18 months, we risk devastation to our economy on a scale that could make the 2008 financial crisis look like a mere scuffle. And that’s before you factor in an oil crisis, tottering financial institutions in Europe and a sclerotic China unlikely to bail out the world economy a second time.

Enforced isolation means production down, spending down, consumption down; it means unemployment up and businesses shutting up shop. As the Government acknowledges, these measures pose a threat to thousands, with the hospitality, retail and entertainment sectors at obvious risk, while manufacturing could be laid low by damaged supply chains across the world.

The many companies who have been dining out on debt and cheap money for a decade will not be able to hold out long, while even those blessed with prudent management may struggle to last more than a couple of weeks without taking an axe to the payroll.

The self-employed face a particularly bleak future, with little in the way of a safety net. In a country where 15% of the adult population have no savings at all, and 33% have less than £1,500, plenty will struggle holing up for weeks at a time.

Sometimes commentators like to hold up ‘public health’ and ‘the economy’ as opposing forces in this scenario, but the truth is to a great extent they rely on one another.

So it is right that later today, Chancellor Rishi Sunak is set to reveal new economic weapons with which to fight the impact of Covid-19. But what should his target be?

The cases that get the most attention will inevitably be the giant flagship companies, like British Airways. But the Chancellor needs to save most of his ammunition for small and medium sized businesses – of which there are almost  six million. If large firms are seen to be bailed out at expense of the shopkeeper or small entrepreneur, Sunak could accidentally foster a populist wave of resentment that floods the political landscape once the virus has laid waste to it.

So how to go about it? One suggestion would be for the Government to put a four-month pause on Employer’s National Insurance, making it easier to keep people on the payroll. They could also postpone the payment of VAT and suspend the payment of company rent and energy bills, along with re-affirming the Government will agree to pay sick pay (as laid out in the Budget) and commit to the reclaim procedure being quick, simple and efficient.

We could also take inspiration from Europe. Sweden has announced they will guarantee 90% of laid-off workers’ income, while Denmark has set the level at 75%. There is a strong case for the British Government to follow suit, making clear that the measures are temporary and to last as long as social distancing and suppression remain the government’s policy.

An important example is Norway, which plans to pay the self-employed 80% of their average income from the last three years (with a ceiling of £48,000). An equivalent measure in the UK would protect some of the most vulnerable and disincentivise the self-employed from continuing to work – out of economic necessity – while carrying the virus.

Sunak could also announce that he is scrapping the five-week waiting time for Universal Credit – or even introduce a temporary Universal Basic Income which could be clawed back through the tax system once the virus has abated, in order to protect those most in need.

There are also some basic economic measures that Government could put in place to both facilitate its public health strategy and mitigate some of its other immediate effects – many of which people have been calling for with increasing urgency.

One of the most important is to demand people ‘stay away from pubs, clubs, restaurants and theatres’, rather than merely advising them to. While the message will, I’m sure, be taken seriously by the public (ie consumers), it also means that these businesses will be unable to share their losses with their insurer, since advice does not constitute direct enforcement. This is self-defeating and harmful to the very businesses we need to protect.

Sunak should also announce a dramatic increase in investment in Personal Protection Equipment (PPE) for NHS staff. The Government has talked a decent game on the NHS, but reports on the ground – including from many family members and friends who work in the NHS – paint a more worrying picture.

In at least four hospitals I’ve been told staff are working on wards with Covid-19 patients without the proper safety equipment, something corroborated by anonymous interviews elsewhere. Not only does this put them at grave risk of catching the disease, it puts them at risk of spreading it to other patients.

It also feels like we need to pump more money into testing, as per the Director General of the World Health Organisation’s simple message yesterday: ‘Test, test, test’. NHS staff aren’t being tested, nor are people who are self-isolating with symptoms.

Not only does this risk the disease spreading faster through the hospitals, it means we are dealing with an incomplete picture of its movements and speed, thereby making it to harder to track.

Now, all of these measures are going to be astronomically expensive – and I suspect they represent just the tip of the proverbial iceberg. Ramping up debt is a real concern – who will buy the West’s debt in the near-future? Who will prop us up, and what leverage will it give them? And what about the prospect of soaring inflation through the 2020s?

But these are concerns for tomorrow. Today the calculation is simple and immediate. We will get through this. But the Government needs to make sure there is something to come back to when we do.

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Frank Lawton is Deputy Editor of CapX