The Covid-19 pandemic caused the deepest recession in modern economic history. As lockdowns and other measures to protect public health were introduced, consumption and production slumped and unemployment rose. In the UK the fall in economic output was among the largest in the world, with GDP (Gross Domestic Product) declining by 9.8% in 2020, estimated to be the steepest fall in three hundred years.
Government support measures have kept many businesses going and the job furlough scheme at its height was keeping nearly 9 million workers in employment. But many firms have already gone out of business, and when the furlough scheme comes to an end unemployment is projected to rise to 2.2 million people, or 6.5% of the labour force.
The economic crisis has not affected everyone equally. Workers on insecure employment contracts saw their jobs go first, while many others on low incomes who cannot work from home have been required to continue working in often risky workplaces. Those on good incomes have been able to save. But many of the least well off have seen their debts increase. Many people have been pushed into poverty. Women, young people and those from black and ethnic minority groups are disproportionately represented among those whose living standards have been hit.
Analysis by the Resolution Foundation showed that in the first wave of the crisis 2 million employees fell below the minimum wage, leading to a gathering private debt crisis for lower-income households.
The Women’s Budget Group has analysed the impact of the pandemic on women in terms of health, employment and unpaid work, noting increased levels of poverty, debt and mental health deterioration.
The Resolution Foundation’s analysis of the economic impact of the Covid crisis on different age groups finds the young and old most badly affected.
The Runnymede Trust has looked at the impact of the crisis on black and ethnic minority communities, finding that long-standing inequalities have led to disproportionately severe health and economic effects.
In its Living Standards Outlook the Resolution Foundation forecasts household incomes to continue falling in 2021-22, and without a policy change the largest increase in poverty since the 1980s.
The TUC noted in June 2021 that only 14% of the 790,000 jobs lost across manufacturing, retail, hospitality and the arts during Covid had been recovered.
So far most governments have focused their economic policies during the pandemic on keeping businesses alive and workers in jobs, and supporting household incomes.
As social restrictions have been eased and economies opened up again, there has been a sharp recovery in GDP. Consumer spending has risen, particularly in areas where there is pent-up demand such as hospitality and leisure activities. But the loss of many businesses during the crisis, and much higher levels of unemployment, mean that a full-scale recovery will not occur quickly. Although the growth rate is temporarily high, the level of output - national income - remains below pre-pandemic levels, and permanent damage is likely to have occurred.
There remains therefore a strong case for further fiscal stimulus measures to boost economic output and bring unemployment down. Both the OECD and the IMF have urged governments not to return to austerity. They note that with interest rates already near zero, there is little more that monetary policy can do.
An expansionary fiscal policy is needed, they argue, to create demand and boost investment, and thereby to create new jobs. Where interest rates are very low, they note, the ‘multipliers’ from government spending (the mechanism by which spending expands throughout the economy) are particularly strong.
Summarising its latest Economic Outlook, the OECD’s chief economist has urged countries to maintain their fiscal spending until full employment is reached, particularly through public investment in the digital and green transitions.
The IMF’s chief economist explains why an expansionary fiscal policy is needed to create jobs and stimulate private investment. The IMF highlights the critical role of public investment.
Assessing the March 2021 Budget, the Institute for Fiscal Studies notes that the Government's future spending plans are 'implausibly low' relative to social needs and demands.
Oxford economist Simon Wren-Lewis argues that, while the UK government has adopted broadly the right macroeconomic policy since the pandemic struck, it is still pursuing the austerity public spending programme introduced in 2010.
Nobel prize-winning economist Paul Krugman explains why a sustained stimulus programme is the economically rational response to the economic downturn.
The free market economic ideas and policies which were first introduced in the 1980s under Margaret Thatcher in the UK and Ronald Reagan in the US came to be known as ‘neoliberalism’. Neoliberalism is the doctrine that economic growth and human freedom are best served by the expansion of deregulated markets and private enterprise, and a reduction in the activities and size of the state. It is often described as the dominant paradigm of the last four decades, effectively espoused not just by right-wing governments but by avowedly centre-left ones which (it is often claimed) failed to reverse or challenge its principal policies.
Neoliberalism has been widely criticised. Its economic policies have led to a significant growth in income and wealth inequality and pervasive environmental degradation. The globalisation of commerce and free trade promoted by neoliberalism has in many countries led to the destruction of traditional industries and the communities which have relied on them. Deregulation has led to a huge expansion of the financial sector, and of the influence of financial objectives in companies and society, a process often described as ‘financialisation’.
Though neoliberalism claims to promote market competition, in key sectors (such as digital platforms and public services outsourcing) it has enabled the development of extremely powerful companies operating as near-monopolies. The process by which wealth is extracted from the economy by a relatively small group of financial and monopoly asset owners has led some to describe the neoliberal economy as ‘rentier capitalism’.
The Adam Smith Institute defends the neoliberal ideal and sets out a neoliberal manifesto for the UK in the 2020s.
The Adam Smith Institute calls for the UK to become a ‘Singapore-on-Thames’. It argues that the UK should adopt a range of free market policies, such as cutting taxes and regulations, to make the economy more efficient. But the bulk of the report proposes greater marketisation and competition in key public services such as healthcare and education, in order to reap the rewards of higher growth and better outcomes.
US writer Robert Kuttner analyses the ‘political success and economic failure’ of the neoliberal project.
Describing the way in which its ideas took hold, the writer George Monbiot attacks the impact of neoliberalism over the past forty years.
The Harvard economist Dani Rodrik argues that the economic assumptions and policies associated with neoliberalism do not represent the thinking of mainstream economics.
Political economist Brett Christophers explains the concept of rentier capitalism and how the UK economy has become ‘rentierised’. (Long version here.)
Tackling the climate emergency has become the focus of recovery efforts around the world.
Global greenhouse gas emissions must be nearly halved by 2030 in order to limit global temperature rises to 1.5 degrees celsius above pre-industrial levels.
However, climate change is just one part a wider environmental emergency being driven by economic systems around the world.
The planet also faces major challenges with depleted soil quality, water shortages, and mass species extinction.
These crises are expected to pose a greater threat to health, society and the economy than the Covid-19 pandemic.
In This is a Crisis, IPPR warns that we are already living in the "age of environmental breakdown", which is destabilising societies and economies around the world. It also warns that decision-makers and key institutions are not taking the threat seriously.
The UN's Global Assessment Report on Biodiversity and Ecosystem Services provides an authoritative summary of the health of the natural world, the factors driving its destruction, and actions that should be taken in response.
The United in Science 2020 Report provides a global update on the climate emergency. It warns that global temperatures have risen by 1.1 degrees celsius and dramatic emissions cuts are needed to keep it below 1.5.
As governments around the world are urged to ‘build back better’, a major focus has been to ensure that their economic recovery packages support environmental objectives. The language varies slightly – green, sustainable, resilient, ‘green and fair’, ‘green and just’, decarbonisation – but the core idea is consistent.
This is that governments should invest and create jobs in sectors and activities which align with long-term greenhouse gas emission goals (notably ‘net zero’ by 2050 or before), improve resilience to climate impacts, slow biodiversity loss, reduce pollution and increase the circularity of resource use.
Analysis of spending programmes of this sort – including those implemented after the financial crash in 2008 – show that green spending tends to have high job creation potential, which can often be geared towards economically disadvantaged people and areas. Many green projects can be delivered relatively quickly.
Calling for a ‘sustainable, resilient recovery’, the OECD urges governments to adopt economic policies which will reduce the likelihood of future shocks and increase society’s resilience to them.
In collaboration with the IMF, the International Energy Agency has set out a global ‘Sustainable Recovery Plan’ designed to boost economic growth, create millions of new jobs and put global greenhouse gas emissions into structural decline.
Leading economists including Nick Stern and Joseph Stiglitz have examined the potential economic benefits of a green recovery. Cataloguing more than 700 stimulus policies and surveying 231 experts from 53 countries, they found that green projects create more jobs, deliver higher short-term returns and long-term cost savings than traditional fiscal stimulus measures.
The World Resources Institute has drawn lessons from the green stimulus packages enacted in 2008-10 for the current Covid response.
The proportion of total UK tax revenues raised from taxes on property, wealth and inheritance are low, with only property taxes raising significant sums.
Parents and property are the best predictors of life chances, but the best policy tools for correcting this – wealth and inheritance taxes – are highly unpopular, even with those who would not have to pay them.
Wealth inequality reduces economic dynamism. Households with no wealth or savings lack the security to take new risks, such as entering education or starting a business.
Higher taxes on capital income, property and inheritance, or net wealth could help to tackle wealth inequality. Property taxes could focus on ownership rather than residency, as is the case with the UK’s Council Tax. Unpopular inheritance taxes might be replaced by taxes on lifetime wealth transfers or recurrent taxes on net wealth.
This IPPR report on tax reform calls for all income from wealth to be taxed under the income tax schedule, inheritance tax to be replaced with a lifetime donee-based gift tax, and Council Tax by an annual property tax.
The Washington Center for Equitable Growth argues that a US wealth tax would increase productivity while reducing inequality.
A report from the Russell Sage Foundation of Social Sciences - How Wealth Inequality Shapes Our Future - shows how wealth and wealth inequality are intertwined with nearly all aspects of economic and social life.
The UK’s top rates of income tax were cut sharply in the 1980s. The Conservative government believed that this would encourage the wealthy to work harder and save more. It was hoped this would boost investment and economic growth enough to offset the loss of tax revenue. Investment and growth actually weakened.
Cuts to top rates of income tax have reduced the gap between the tax rates levied on high and low incomes. This has boosted inequality and has no significant effect on economic growth or unemployment. Proposals for reform of income taxes tend to focus on raising tax rates on higher incomes to make the system more progressive. Reformers in the UK have proposed "smoothing" the uneven marginal rates which currently characterise the income tax schedule.
A report from the University of Cagliari finds that marginal rates of income tax have a statistically insignificant impact on economic growth.
Professor Simon Wren-Lewis lays out the political as well as economic reasons for high top rates of income tax.
The IPPR report Tapering Over the Tax recommends merging income tax and National Income Contributions, and replacing income tax bands with a taper-system. The authors claim this would be more progressive, better incentivise work and leave room for raising significantly more revenue from income tax.
The Resolution Foundation proposes a Health and Social Care Levy that, combined with changes to National Insurance, would raise substantial revenue, protect lower-income households and reduce tax distortions that incentivise self-employment.
A person earning £40k a year from their job pays more tax than someone living off £40k a year in capital income from their accumulated or inherited wealth.
Tax rates on capital income have been cut by more than those on income from work, despite property and financial wealth rising more rapidly. UK tax rates levied on dividend payments and capital gains are now lower than the equivalent labour taxes.
The rationale governments give for taxing capital so lightly is that it encourages entrepreneurship and therefore improves economic performance. Research from the Institute for Fiscal Studies shows lower UK rates of capital gains tax have not boosted investment.
The Institute for Fiscal Studies report on owner-managed businesses shows that low rates of capital gains tax on business income can lead to large tax savings but will not boost investment.
The Resolution Foundation report Who owns all the pie? examines how UK wealth has grown more rapidly than income and looks at the scale of wealth inequality.
This report from the Washington Center for Equitable Growth explains how the US should go about raising more tax on capital income. It lays out both major structural reform and intermediate steps that could be taken by policymakers.
Policymakers can also introduce less targeted financial taxes such as bank levies, which can help to curb systemic risk and ensure that the taxpayer benefits from the rewards of financial risk-taking rather than simply bearing the costs.
The UK introduced both a corporation tax surcharge for banks and a bank levy in the wake of the financial crisis of 2008. This was levied on the global balance sheets of large banks operating in the UK, but the revenue generated by the tax has fallen since the financial crisis in part due to changes to its structure introduced in 2016.
Sheffield Political Economy Research Institute assesses the effectiveness of the bank levy and the corporation tax surcharge, and the impact of subsequent changes to these taxes. It warns that the tax now appears to hit smaller and challenger banks more than global banks, and that those that contributed the most to the 2008 crash are not bearing the highest cost.
Michael Devereux, Niels Johannesen and John Vella of the Saïd Business School assess the effectiveness of bank levies across Europe, arguing that while they did reduce risk, they had less of an impact on systemically important financial institutions.
Tax systems can play a central role in creating fairer and more efficient economies. Economic growth increasingly depends on the quality of public goods that only governments can provide, such as education, healthcare, and childcare. Taxing high incomes too lightly will increase inequality, which can damage social and political cohesion and weaken economic growth, as acknowledged by the IMF.
Many economists agree as to what constitutes a fair and efficient tax system. They believe the tax base, the activities and entities on which taxes are levied, should be as broad as possible, with few ad hoc deductions and exemptions. It could be made more progressive, with taxes levied according to taxpayers’ ability to pay. Some propose that tax systems could penalise activities that do harm, such as pollution or financial speculation.
The Institute for Fiscal Studies identifies a programme of tax reform for the UK in the final report of a major review led by the late James Mirrlees.
In the Journal of Economic Perspectives Henrik Jacobsen Kleven cites reasons why Scandinavian countries are able to levy so much tax. These include broadness of their tax base; the subsidisation of goods, such as childcare, that make it easier to work, and public tax returns.
This report from the Center for American Progress explains how cutting taxes on one form of income can mean pushing up taxes on another.
A coalition of charities, think tanks and NGOs, including Oxfam UK and Christian Aid, has called for progressive reform of the tax system, in preparation for a fairer post-Covid world. Demands include no bailouts for those seeking to avoid tax and proper and fair taxation of wealth.
