Right from the start of the coronavirus pandemic, it’s been imperative that we avoid a “second wave” of infections. This statement, obvious as it is in human and social terms, applies with particular force to the economic and financial situation.
From a wholly non-partisan standpoint, it seems clear that Mr Johnson’s administration has mishandled the coronavirus crisis to the point where policy is dysfunctional, and much public trust has been eroded.
The British government does not, of course, have any international monopoly on this sort of bungling, but there are compelling reasons why the UK needs now to be thinking far beyond divisive, argumentative and ineffectual regional responses, in order to avert even worse economic, financial and broader outcomes.
To understand why, we need to note that Britain, in common with most other Western countries, initially adopted a ‘standard model’ response to the economic impact of the crisis.
This model has two distinct components – ‘support’ and ‘deferral’. Support has meant propping up the incomes of households affected by the crisis, a policy exemplified by furlough wage payments. Deferral, meanwhile, has involved delaying financial outflows by granting ‘holidays’ from the payment of debt interest and rent owed by households and businesses.
In terms of the public finances, support and deferral have very different time-scales. Whilst the provision of income support has an immediate cost to the government, granting interest and rent ‘holidays’ instead puts the initial burden on counterparties such as lenders and landlords. There are, of course, limits to how long these counterparties can carry these burdens, meaning that a point must come at which the state has to come to their aid too.
Ideally, government would not find itself paying for income support, and bailing out lenders and landlords, at the same time. All along, this calculus has been a very strong economic reason for doing everything possible to avoid a “second wave”.
Now, unfortunately, the second bout of infections has arrived, compounded by the approach of winter. This puts government in precisely the position that needed, at all costs, to be avoided. Some forms of support payment are having to be reintroduced, whilst we cannot expect lenders and landlords to absorb much more of the cost of interest and rent deferral.
Two further factors complicate the British situation. The first of these, of course, is “Brexit”, where perhaps the only comfort to be drawn from the current situation is that a mutually beneficial agreement is every bit as important to Euro Area countries as it is to the United Kingdom.
It is to be hoped, even at this very late stage, that Paris and Dublin, in particular, will lead an effort to impose a much more pragmatic stance on the Brussels-based negotiators. If there was ever a point at which ‘punishing’ the British for their “Brexit” decision made any sort of sense, that point has long been passed.
The second complication is the sheer scale of British exposure to the world financial system. This is illustrated by financial asset ratios. As of the latest published date (the end of 2018), UK financial assets equated to more than 11.2x national GDP. This is a drastically more extreme exposure than that of the United States (4.8x GDP), the Euro Area (6.9x) or Japan (7.4x).
Analysis of past data indicates that a massive ramping-up of this exposure took place during the Blair-Brown years, when “light-touch regulation” helped to drive the ratio up from 5.9x GDP in 2002 (when the data series begins) to 15.8x in 2008. Subsequent administrations have done something to reduce this exposure but, in terms of risk, it remains excessive.
It’s unfortunate, too, that the experience of the 2008 global financial crisis (GFC) has given rise to a certain complacency, if not in governments or central banks then amongst the general public, investors and corporate management.
Contrary to widespread supposition, the Bank of England and other central banks cannot create ‘new’ QE money ad infinitum. Moreover, there are differences of quality, as well as of quantity, between the use of QE to shore up banks and markets, as in 2008-09, and its use to support the broader economy, as many now advocate.
Even the Federal Reserve, which benefits from the reserve status of the Dollar, recognises limitations to the scope for enacting QE. This applies with particular force to the United Kingdom, where a serious slump in the value of sterling could have almost incalculably adverse consequences. This is one very good reason for chancellor Rishi Sunak’s evident reluctance to push public spending, and the deficit, to ever higher levels.
Cartoon character Popeye was famous for saying “I yam what I yam”, and the current predicament needs to be accepted as ‘we yar where we yar’. That we have not succeeded in preventing the “second wave” should increase, not reduce, the imperative of finding better ways of combating the coronavirus.
Whilst another general lockdown needs to be avoided, the current emphasis on regional closures seems most unlikely to be successful. A workable alternative might be operated along sector rather than regional lines.
There are some activities which, as well as being essential in themselves, are sizeable components of GDP, and can be operated with reasonably effective safety precautions. These ‘priority sectors’ are typified by food retailing – we all need it, it’s a big component of GDP, and it’s possible to run supermarkets quite safely.
At the other end of the scale there are activities which do not qualify as essential, are in many cases pretty small parts of the economy, and would be hard, and often impossible, to operate in bio-secure ways.
The exemplar here has to be international travel. Scientists have long warned that, in the highly likely event of a global pandemic, no country could expect to eliminate the virus unless it was prepared to close its borders to all but absolutely essential travel.
A further advantage of a sectoral approach would be that the state’s limited capability to provide financial support could be concentrated on sectors most directly affected.
The public cannot be expected to like any of this, including prohibitions on foreign holidays, and even on lengthy car journeys within the country, plus bans on mass gatherings, and on the crowding of beaches. But closing down highest-risk, lower-importance sectors and activities might prove to be more acceptable, as well as much more effective, than a creep back towards general lockdown by shuttering increasingly large geographical regions.
Based on its track record so far, it seems unlikely that the current government can operate (or sustain public support for) the new approaches that are surely necessary. These need to include effective ‘test and trace’ procedures, conducted by the public sector, and the imposition of the same restrictions on everyone, enforced without fear or favour.
A government which thinks that we can safely reopen holiday flights to the Canaries – or that the ‘rule of six’ need not apply to grouse-shooting – clearly lacks the consistency, the resolve and, increasingly, the credibility to halt the pandemic before it wrecks the national finances. It is at least arguable that no single party can accomplish what is necessary – or survive the probable voter discontent.
The formation of a government of national unity isn’t something that anyone would undertake lightly. But if ever, since 1940, there has been a case for taking this path, this might well be it.
