March 31, 2020
Back in early March, this In the Limelight looked as if it was going to be a fairly straight forward analysis of a Budget which promised a big increase in infrastructure spending and some emergency measures in response to the COVID-19 pandemic. But as the former Labour Prime Minister Harold Wilson said, ‘a week is a long time in politics’.
Between March 11 and March 20, the new Chancellor Rishi Sunak gave not one, not two, but three major speeches, each of which completely blew apart the economic parameters of the last.
The first on Budget day was significant in that it marked a significant departure from the austerity budgets we have seen in recent years. Speaking to the House of Commons on March 11, the Chancellor revealed plans to spend £600 billion over five years on investment in infrastructure, housing, R&D, broadband and the green economy – a figure which Mr Sunak describes as “the biggest increase in public net investment since 1955.”
A £30 billion emergency stimulus package was also announced to support the economy in the wake of the COVID-19 pandemic. But no sooner had the Chancellor set out his ambitions than it became clear this programme wasn’t going to be anywhere near enough.
COVID-19 has disrupted the global economy on a scale unimaginable just a few short weeks ago. To get the public health situation under control, Governments across the world have essentially closed down their economies to prevent the spread of the virus.
Already, the economic impact of this has been ruinous. Difficult as it may be to process, the UK is in the mire of a financial crisis from which the prospect of a deep, damaging recession grows with each passing day.
That is why the Chancellor has had to make further interventions, first to support businesses with cash grants, attractive loan schemes, business rates holidays and tax cuts and second, to support workers with an unprecedented pledge to pay 80 per cent of the salaries of ‘furloughed’ employees who cannot work due to the virus.
The combined cost of these policies is well into the hundreds of billions. But business organisations, trade unions and other key stakeholders have largely welcomed the steps being taken because of the scale of the crisis.
It is also widely expected that further measures will be announced by the Chancellor, who has adopted a “whatever it takes” approach to avert permanent economic damage.
So, to prevent this article becoming out-of-date before anyone reads it, I thought it might be useful to compare Government handling of this crisis with previous economic crises the UK has faced. For, as this situation is totally unique, there are still many lessons to be gleaned from history about what to do when the whole structure of capitalism collapses in on itself.
The most recent example we can look to is the 2008 financial crisis, which started as a banking crisis in the US housing market but quickly rippled out across the global economy.
Gordon Brown was UK Prime Minister at the time, flanked by Alistair Darling as Chancellor.
Recognising the scale of the crisis, the Labour Government announced a £500 billion bank rescue package, which combined £250 billion of short-term loans through the Bank of England Special Liquidity Scheme with a promise to underwrite £250 billion of equity lending between banks and a £50 billion Bank Recapitalisation Fund.
The UK response was widely regarded as the defining strategy of the worldwide rescue effort and many other countries followed the UK’s lead in announcing similar measures and bailing out the banks.
While the recession that followed the 2008 financial crisis was severe, many economists would argue that it would have been much worse had the Government not taken the decisive steps that it did at the time.
There is a precedent for what happens when Governments do nothing in the wake of an economic crisis and that is the Great Depression, which started on Wall Street in 1929 and painfully became the worst recession in history.
In the early 1930s, the economic consensus was that the economy should be left to its own devices because markets are self-regulating, and it was not the role of Government to get involved.
This flawed response meant that between 1929 and 1932, worldwide GDP shrank by an astronomical 15 per cent. For reference, worldwide GDP fell by less than 1 per cent in 2008.
In the UK over the same period, industrial production fell by 23 per cent, wholesale prices by 33 per cent, international trade by 60 per cent and unemployment increased by 129 per cent.
These two examples from history should give us some pause for hope as we brace ourselves for the COVID-19 recession. That’s because this time around, the Government’s strategy is much closer to the 2008 response than to 1929.
At the time of writing, Rishi Sunak has announced measures which at the very least match the £500 billion announced by Alistair Darling 12 years ago. Coupled with the Coronavirus Jobs Retention Scheme, it does look like the Government is committed to do whatever it takes, and that bodes well for the future.
North East Times recognises that the COVID-19 situation, responses and impact are ever changing. This information was correct at time of print (March 25).