Spencer Livermore on the economic challenges facing the UK, post-Covid 19
The Covid-19 pandemic has created a shock to economic activity that is unprecedented in both its speed and severity. Against this backdrop, the March Budget – just eight weeks ago – already feels like a plan for a different age.
Yet it was clear even then that Chancellor Rishi Sunak was presiding over an economy with serious underlying weaknesses. Before this crisis, he presented an extraordinarily weak situation for the UK, with – according to the OECD – the worst average annual growth forecast on record and rapidly deteriorating public finances. Net debt, meanwhile, had doubled from £1 trillion to £2 trillion over the past decade and was already forecast to rise relative to national income, reaching nearly 80% of GDP.
Going forward, the impact of the coronavirus crisis on the economy will be vast and unprecedented. The Office for Budget Responsibility has set out an initial scenario, which assumes GDP falls by 35% in the second quarter of this year, while unemployment rises by more than 2 million to 10%. As a result, public sector borrowing would increase this year to £273 billion – around 14% of GDP – the largest single-year deficit since the Second World War, and debt would exceed 100% of GDP.
But as the Director of the Institute for Fiscal Studies, Paul Johnson has observed, “these figures are predicated on a swift recovery. Should the economy fail to bounce back, the picture would worsen further.”
The Resolution Foundation has attempted to reflect this uncertainty by providing a range of forecasts, depending on whether social distancing measures remain in place for three, six, or twelve months. They estimate the resulting fall in GDP this year could be 10%, 20%or 24%, respectively, with unemployment rising to 2 million, 5 million or over 7 million.
However severe the coming recession, policy makers will need to manage a protracted period of disruption to lives, livelihoods and finances. There will be an urgent need to stimulate and rebuild the economy as and when we move out of lockdown, and we will need a radically different approach to that seen over the past decade.
Former Chancellor George Osborne’s disastrous decision to take so much demand out of the economy made the UK’s recovery the slowest in eight generations – and one that dragged along when compared with many other countries. As a result, we had the worst decade for pay growth for 210 years.
In time, the government will also need to begin restoring fiscal sustainability, and here again, we will need a radically different approach to what has gone before.
In the years following the global financial crisis, a period of fiscal retrenchment was undoubtedly necessary. But there were clear choices to be made about who in society should bear the greatest burden – and the distribution of austerity since 2010 has hit the most vulnerable in our society particularly hard.
While money was found to cut the top rate of tax, the poorest working-age families with children were made over 6% worse off. While some of the richest working-age families with children gained £1,000 a year, the poorest lost £3,000 – 15% of their income.
The financial resilience of many families was undermined, and our economy and public services were weakened, ill-prepared and ill-equipped for the storms ahead. Future Budgets must move away from the failed strategy of the past and build a new social contract fit for the post-Covid 19 age.
Lord Spencer Livermore is a member of the Shadow Treasury team in the House of Lords. He tweets @SpenceLivermore
Published 5th May 2020