In our latest blog, NERI Co-director, Paul Mac Flynn discusses what it is we are actually trying to rescue post-lockdown?
The UK budget earlier this month saw the Westminster government’s first attempt to provide a post-lockdown boost for the economy. As the European Union finalises the details of its financial rescue package, now is a good time to pause and consider what it is we are actually trying to rescue.
It is clear that many governments have borrowed heavily in order to provide short term emergency support to the economy in order to prevent collapse. Providing supplementary social transfers and additional public spending in health systems and other public services was necessary and largely unavoidable. That, however, was the easy part.
Any discussion about ‘stimulating’ the economy requires a frank and honest discussion about the prospects of escaping from the current climate of caution concerning the Coronavirus. It is becoming increasingly clear that while we can open up parts of the economy, the unstable nature of public health advice over the foreseeable future will make large sections of the economy unviable. This uncertainty affects business in different ways. Even though, the public health restrictions may have allowed some businesses to reopen, many are still likely to fail in the near future.
For some businesses, the potentially fluid nature of public health advice poses the greatest threat. As we have seen in countries like Hong Kong and South Korea, even when the initial virus outbreak appears to have abated, small clusters and mini outbreaks are possible even with mask wearing and other social distancing measures. The response in these countries has been to reimpose restrictions and impose localised lockdowns.
It is likely that governments here would engage in similar measures to control such outbreaks. For many businesses which have only just exited lockdown, the possibility that, at any point in the future, there could be an indefinite halt to trade is likely to be an insurmountable impediment to remaining open.
For other businesses the greater danger is that current health advice will not change any time soon. Many businesses reopened at the end of lockdown in the hope that the remaining restrictions on public gatherings and interactions would be short lived.
Consider a large bar in the city centre operating under current guidelines. Many of these businesses are serving fewer customers and require a greater number of staff to do so. While it may be possible to operate such a business model in the short term, unless the remaining restrictions are lifted, such a business is not viable in the longer term. This situation may apply to many businesses which have recently reopened and may give false hope that economic recovery has been easy to achieve.
We cannot at this point know how long the virus will remain a threat to human health. Whether it can be contained by public health measures or whether a vaccine or treatment can be reliably developed in the near future is unknown.
What we can say at this point is that governments will decide what restrictions remain in place and what actions will be taken in response to any possible outbreaks. Judging by what has occurred over the crisis period to date, that response is likely to err heavily on the side of caution.
As the current suite of emergency support measures for the economy come to an end, we have to recognise that our response to this pandemic has changed our economy considerably. There needs to be an acknowledgement of that fact before we look to disburse funds.
The economic disruption that followed the virus outbreak is very different to recessions that have gone before. The disruption was artificially induced and the economic recovery that will follow will be artificially constrained. There will be no natural upswing whilst restrictions of any kind remain in place.
This means that any recovery package announced by any government cannot be seen as a stimulus. A stimulus by its very nature is concerned with speeding up a reaction that is already taking place. The problem we face is the absence of any reaction at all.
We need to accept what has been lost and begin discussions about what is to replace it. The transition toward a decarbonised economy presents the most obvious route to create new economic activity whilst also tackling an arguably greater threat to life on this planet.