What now for Britain's economy – a new direction, or business as usual?
The coronavirus crisis provides an opportunity to stop two centuries of decline. But that’s going to take a lot of courage
The day the World Health Organization declared Covid-19 a global pandemic was also the occasion of Rishi Sunak’s budget. Announcing an extra £12bn to fight the virus, Britain’s newly appointed chancellor said the measures were “temporary, timely and targeted”.
That was less than six months ago, but it now feels like a long time. Within days of the budget, Sunak’s three-Ts approach became redundant. The economy was in a deep freeze, and the country had gone into full lockdown.
To give the chancellor his due, Sunak then acted fast and big, putting in place schemes that would help households and businesses through the crisis. When the shortcomings of hurriedly assembled policies were pointed out, he was happy to do some running repairs, regardless of the cost. And over the past six months, the bill has been getting bigger and bigger.
At the time of the budget, Sunak expected to borrow around £60bn for the whole of the 2020-21 financial year. In the first four months of 2020, the government has run a budget deficit of £150bn.
This emergency action was only ever going to be part of the story. As you would expect from a country that found itself unexpectedly under attack, the response had to come in phases: first ensuring survival, then winning the war, then finally putting right the problems that had left the nation vulnerable in the first place.
Phase one is over, and has been for some time. Although the economy contracted by 20% in the second quarter of the year, the collapse was concentrated in a relatively brief period between late March and early May. Since then, the economy has been growing again and is likely to have expanded by at least 15% in the current quarter.
Phase two is going to be longer and trickier – in part because Sunak’s decision to make businesses pay a portion of their wage bill, irrespective of whether they are trading or not, and to phase out the furlough scheme entirely by the end of October, are classic unforced errors.
Having shown commendable flexibility when putting together his rescue package, Sunak has been hardline in his insistence that there must be an end to the scheme in less than two months, come what may. This will cost jobs, as the chancellor knows full well, because at the last count one in eight workers – roughly 3 million people – were still being furloughed.
Sunak’s response has been twofold. Firstly, he has announced a £2bn kickstart job creation programme for 16- to 24-year-olds. The Federation of Small Businesses says this will not be nearly enough to prevent a “lost generation” of young people from the Covid-19 recession, which sadly would appear to be all too true. There has not been a tougher climate for school-leavers and graduates in decades.
Secondly, the chancellor has sought to get the economy running hot through time-limited cuts in VAT and stamp duty, and his eat out to help out scheme. This is a tried and tested formula: get people into the shops and bars, boost demand for houses, and stimulate a feelgood factor.
In the short-term, this strategy might be regarded as a success. Mortgage approvals more than doubled in July. The Nationwide building society reported the biggest monthly increase in house prices in 16 years in August. The Monday-to-Wednesday takings for the restaurants that have taken part in eat out to help out are well up on last year.
But even if (and it’s a big if) these measures have a lasting effect, they do nothing to address longer-term structural problems with the economy. In fact, they threaten to make these worse by increasing the economy’s dependency on import-driven consumption and an overheated property market.
A potted modern economic history of Britain goes like this. The country industrialises in the 18th century and becomes top dog in the decades after the Napoleonic wars. It’s already suffering from relative decline by the second half of the 19th century.
It never really addresses problems of 20th-century industrial decay, because of smug complacency fostered by victories in two world wars. It has a touching belief in quick fixes to address poor skills, weak investment, rotten management, low levels of innovation and a short-termist financial system.
All of this has led to flatlining productivity and an abundance of low-paid, insecure jobs. Britain’s failure to move with the times is summed up in one fact: the market capitalisation of one US tech giant – Apple – this week exceeded that of the 100 biggest quoted companies on the London Stock Exchange.
The Covid-19 crisis revealed that Britain was ill-prepared for a pandemic. It was deficient in both human and physical capital. It made a vague pass at having strategies for energy, industry and skills, but no more than that.
Once the scale of the crisis became obvious, the Treasury and Bank of England did as much as they could to mitigate the impact. Even so, the past six months have already left scars: even weaker productivity, a loss of schooling, and zombie companies kept alive by low interest rates and Treasury-backed loans.
The country is now at a fork in the road. One way leads to the place on the map known as “business as usual”. This involves talking a lot about the need for fundamental change and the importance of doing better next time, but in reality means carrying on as before.
The other route offers potentially greater rewards, but is far tougher because it requires behavioural change on the part of government, companies and individuals. It means a national business plan, ambition, hard graft and tons more patience than has been shown in the past. Don’t hold your breath.
Larry Elliott is the Guardian’s economics editor