The economic crisis
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.
Protecting jobs and incomes
To keep businesses running and people in jobs during the Covid-19 crisis, the UK government established a number of emergency measures.These include the Job Retention Scheme, which supports companies to put workers on furlough rather than lose their jobs; a support scheme for the self-employed; and loan schemes for various sizes of business.
Specific measures and funding were provided for badly affected sectors, such as hospitality and the performing arts. At the same time the government temporarily increased the rate of Universal Credit and Working Tax Credits paid to those on low incomes.
These measures have supported many businesses and households. But there have been a number of criticisms. In January 2021 over 1.5 million self-employed people were estimated not to qualify for support because less than half their incomes came from self-employment or they had not been self-employed long enough.
The government’s business loan schemes have been criticised for favouring landlords, who in many cases continued to be paid rent in full while their tenants had to take out emergency loans. Meanwhile the significant increase in poverty caused by the pandemic has led to a widespread call for permanent increases in Universal Credit and child support levels.
The economic case for a fiscal stimulus
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.
How do we pay for government spending?
The Covid pandemic has forced governments across the world to spend huge amounts of money supporting their health systems and emergency public services, and sustaining business and household incomes. In the UK, the government spent an estimated £372bn in 2020-21 tackling the crisis.
This money has come from increased government borrowing. In the fiscal year 2020-21, the budget deficit (the gap between revenue and expenditure) was £298 billion (14.2% of GDP), its highest peacetime level, and total public debt rose to 99.7% of GDP, the highest since 1961.
Unsurprisingly, this has led to questions about how and when this money should be repaid. Some people have argued (or assumed) that there will need to be a return to austerity – public spending cuts and tax rises – to reduce the deficit and the debt.
But most macroeconomists, including international economic institutions such as the OECD and IMF, argue that at current very low interest rates, high levels of debt can be supported for a long period. This is what happened after the second world war, when UK debt reached nearly 250% of GDP. It came down gradually with growth, to around 50% of GDP in the early 1970s.
Since the pandemic started the Bank of England has bought £450 billion of government bonds, equating to almost all of the new debt issued by the government. This has kept the interest rate low, thereby making the debt much cheaper for the government. Some argue for this arrangement to become permanent, a mechanism known as ‘monetary financing’.
Fiscal stimulus and job creation
With unemployment likely to rise when the furlough scheme is ended, many organisations have urged the government to introduce a further fiscal stimulus package to create jobs and meet pressing social needs.
Many of these argue for higher government spending on infrastructure, particularly on ‘green’ and low-carbon projects. Since physical infrastructure spending tends to lead to male employment, others have argued for an equal emphasis on ‘social infrastructure’: sectors such as health, education, social care and childcare which are also necessary for the economy to function and have high levels of female and black and minority ethnic employment.
Increasing the minimum wage, giving public sector workers (especially key workers) a pay rise, and raising benefit levels, would all mitigate the unequal impacts of the pandemic and give a boost to consumer demand.
The government’s youth employment scheme, Kickstart, supports 6-month job placements for those aged 16-24. With youth unemployment known to have a long-term scarring effect on life chances, some have argued that this should be much more ambitious, with a stronger emphasis on skills training.
A green recovery
A care-led recovery
A key dimension of ‘building back better’, it is widely argued, is greater investment in the ‘caring economy’. A ‘care-led recovery’ would see priority given to increasing employment and wages in the health service, social care and childcare.
The Covid crisis has exposed serious under-funding in these sectors, and the need to pay many of those working in them more. Investment in care creates more jobs, especially jobs for women, than comparable spending in sectors such as construction.
The Women’s Budget Group calculates that investment of around 2.5% of GDP in child care and social care would create over 2 million jobs as well as helping reduce the gender employment gap.
'Levelling up' and local economic recovery
The UK government’s commitment to what it calls ‘levelling up’, improving living standards and economic prospects in England’s disadvantaged regions, has led to widespread calls for the government to prioritise stimulus spending in those areas where unemployment is highest and incomes lowest.
In England city region mayors and others have called for greater resources to be given to local authorities to boost local employment. There is increasing interest in the idea of ‘community wealth building’, generating local economic development by focusing public procurement and business support on local firms, including social enterprises.
For more on local economic development, see our page Stronger local economies.
Governments have provided various forms of support to businesses, and in some cases whole sectors, to enable them to survive the pandemic. Many people have argued that, particularly for larger businesses, such ‘bailouts’ should not be unconditional.
In return for financial help, companies should be required to meet a set of minimum standards of good corporate behaviour, such as environmental commitments and payment of tax.
A range of commentators have further called for the government to take equity stakes in the businesses it bails out, as it did for example with the Royal Bank of Scotland after the 2008 financial crash.
This would give the government a long-term stake in the future direction of such companies, helping to focus them on long-term investment and environmental sustainability. Revenues returning to the government from equity stakes could support long-term economic recovery, or form the basis of a social wealth fund.