As of 21 April 2020, there were 2,431,890 reported cases of Covid-19 across every continent except Antarctica, including 169,859 deaths. In response, governments worldwide have closed places of public gathering. Some 3 billion people are now in some form of home confinement. This has unsurprisingly led to a massive slump across most sectors of the global economy.
The British economy will emerge from the coronavirus pandemic in a precarious position. Whether the UK slides into a recession will depend largely on whether the government falls back on the austerity doctrine of the coalition and subsequent Conservative governments and copies the fundamental mistakes which hampered the UK’s recovery from the 2007/8 crash. Preventing a return to the austerity doctrine will be the first major economic challenge faced by Labour’s new leadership team.
The economic problems the UK will face as lockdown restrictions are eased will be similar to those faced in 2007/8. The Nobel Laureate Paul Krugman used an interesting analogy to describe that crisis, explaining it as essentially a ‘software’, rather than a ‘hardware’ problem. This was an update of Keynes’s depiction of the causes of the Great Depression as magneto trouble (an outdated term for difficulties with a car’s electrics). Both of these analogies suggest that those recessions were caused by technical, organisational problems which prevented the economy from operating properly as opposed to some natural disaster which had destroyed natural resources or productive assets. When it emerges from the coronavirus pandemic, the UK will be left in a similar position to those earlier recessions. The virus will mean that much of the British economy will have been in hibernation but it will not have been destroyed. Indeed, when this pandemic has been dealt with, we may have fewer technical issues than in 2007/8. This is because, unlike with the housing bubble, no one commodity has been so overvalued as to require a substantial readjustment in prices (except perhaps toilet roll, but Andrex being overpriced is unlikely to cause a recession). A more accurate analogy therefore might be that, as we emerge from the current lockdown, our economy will be like a laptop which is running on low battery mode. With the right policy mix, the worst effects of a recession could be avoided.
There are already arguments that economies will bounce back from the coronavirus pandemic. United States Treasury secretary Steve Mnuchin has promised that pent-up demand will lead to a rapid recovery as the US and global economies emerge from lockdown. Such an argument assumes that this demand, along with low interest rates, will allow firms to bounce back from the current slump. However, Mnuchin has probably sought to oversell the likelihood of such a recovery, both to reassure markets and provide some political support for the Trump administration, which has been reliant on a strong economy to help secure the president’s base of support.
The suggestion of a quick recovery assumes that the economy will be driven by consumers willing to spend and firms willing to take advantage of low interest rates to make investments. This didn’t happen in response to the last recession, precisely because of the implementation of austerity measures. As Dawn Holland and Jonathon Portes have demonstrated, austerity measures across the UK and Europe largely worsened the recession. The effects of the recession on incomes were exacerbated by government spending cuts, leading to a reduction in consumer spending; while already low interest rates meant that the cost of borrowing could not be reduced any further by central banks to offset the effects of fiscal consolidation. In addition to this, austerity came at a brutal human cost and severe healthcare cuts have played a role in weakening the UK’s response to coronavirus.
Even before coronavirus hit, European central banks were running close to a liquidity trap, meaning that just as with the last recession, monetary policy will not be able to help lift the UK out of this slump. It is therefore imperative that UK consumers retain their spending power after this recession. In practical terms, this means protecting the incomes of the many workers whose livelihoods have been threatened by the virus and the lockdown. Current government policy is to cover 80 per cent of the wages of furloughed workers. However, this still represents a pay cut. As many typically live from paycheck to paycheck, this may force some to turn to any savings they may have to make up the difference; a problem which will be exacerbated by rising prices. All of this will cause a massive loss in savings, which will decrease spending as the economy tries to recover from this pandemic. Therefore, the government should be introducing rent amnesties and price controls if it is to protect the savings of workers.
Once the UK economy emerges from this period, it will need an aggressive fiscal expansion to kickstart an economic recovery. Further austerity measures would only serve to delay the UK’s recovery, copying the same mistakes made a decade ago. It is possible that the current government will respond to the current slump with some sort of stimulus package. Boris Johnson has certainly talked about increased public spending. However, it is worth remembering that before last year’s general election Johnson had planned to cut corporation taxes to 17 per cent. Given the Conservative party’s business friendly history it is likely that any stimulus package will be predicated upon corporation tax cuts. Such tax cuts were included in the Obama administrations response to the 2007/8 crash and severely weakened the effectiveness of the American Relief and Recovery Act.
The Labour party needs to be able to combat the narrative that austerity is a necessary response to a recession. In particular, the new shadow chancellor needs to show that an expansion of public spending is the most effective vehicle for achieving an economic recovery post-coronavirus. Labour must hold the government to account, both to check false claims about government spending and to shine a light on unnecessary tax cuts or corporate handouts. It also needs to prevent the narrative already re-emerging in Conservative circles that cuts are now an inevitable necessity. Successive Conservative leaders have claimed that the economy is safe in their hands. If the Labour party is ever to retake power, it will have to counter this narrative and present a pathway out of this slump.