Last year, and in the Chancellor’s own words, the UK received an “economic shock”. The nation’s largely service-based economy fell victim to a previously unknown virus, as much productive economic activity came to a complete standstill. Two national lockdowns, in an attempt to contain the community spread of coronavirus, effectively closed down entire sectors of the economy. The Office for National Statistics confirmed that economic activity in the UK, as measured by the GDP (gross domestic product), shrank by 9.9 per cent over the course of 2020, in the largest annual fall “since records began”. The largest previous economic contractions were in 2009 (4.1 per cent) and 1921 (9.7 per cent), while the Great Frost of 1709 devastated harvests and led to a massive contraction of 13.4 per cent. It is worth remembering, however, that GDP calculations only date back to 1948, and previous figures of economic activity do not allow exact comparisons between the time periods under consideration.
In these difficult times, the UK government also has to contend with the early effects of Brexit, which has in the short-term hampered cross-border trade with the EU, the nation’s hitherto largest trading partner. Tariffs on the trade of goods have been removed, only to be replaced by new and bothersome non-tariff barriers, which are currently disrupting many supply chains. There are also concerns about the continued global status of the City of London as a financial services provider, awaiting a Memorandum of Understanding with the EU to take matters forward.
Despite the gloomy figures, the British economy has displayed “winter resilience”. The economy actually expanded by 1 per cent during the last quarter of 2020, with a peak of 1.2 per cent in December, as the services sector partially opened up with the loosening of pandemic restrictions. This prevented a dreaded “double-dip recession”. But the lockdowns came at a very high cost. Unemployment soared, rising to 4.9 per cent by December 2020. Public sector net debt rose by £227.6 billion over the year, crossing the £2 trillion mark for the first time, and increased to 99.4 per cent of GDP by December 2020. National debt is now 100.5 per cent of GDP. The IMF further downgraded its predictions of GDP growth in the UK for 2021, from 5.9 per cent to 4.2 per cent. The slump in activity actually wiped out seven years of continued economic growth since 2013.
There are some ways to help re-expand a contracting economy. Governments and central banks can both step in during an economic crisis to ease the pain. The Treasury can adopt expansionary fiscal policies, by increasing public spending, which usually means increased borrowing, and by manipulating the tax system. Acting independently, the Bank of England can adopt an expansionary monetary policy, pumping money into the system by interest rate cuts and by purchasing government bonds (quantitative easing).
During the current crisis, the government has taken the lead when it comes to managing the economy. The Treasury’s £280-billion package of coronavirus support measures has included job protection schemes (Coronavirus Job Retention Scheme and Self-Employed Income Support Scheme), help to businesses (business rates relief, grants and loans, tax deferrals and exemptions), an uplift in welfare benefits and tax credits, and extra spending on public services. These measures have lessened the pain for some sectors of the economy, while others have lost out badly, especially workers in the retail, hospitality, entertainment and accommodation sectors. .
The government’s next moves will be outlined in the Budget of March 3, Predictions of what the government may choose to do have raised fears of increased taxes and of the detrimental effects of cutbacks in coronavirus support measures. Raising taxes is likely to be counterproductive during an economic downturn. Besides many of the ruling party’s backbenchers do not wish to see the government reneging on the 2019 Conservative manifesto pledge of a five-year “triple tax lock” on the trinity of income tax, national insurance contributions, and VAT. There are, of course, other ways of raising tax. Tax revenues can be generated by so-called “stealth” measures, such as freezing personal tax allowance thresholds or taxing pension contributions, and by increasing Corporation Tax . Taxes on online retailers who have thrived during the pandemic are also an option. Shrinking tax bases as a result of inevitable job losses and likely business delinquencies, coupled with a corporate view of high taxes as stifling economic growth, provide counter-arguments to increased tax burdens, which can be likened at times to flogging an overworked horse to death.
The government should prioritise its commitment to increased public spending on infrastructure projects (public transport, roads, hospitals, schools, broadband), including green energy initiatives, which both create jobs and guarantee a payback in the form of increased consumer spending and overall benefits to the community. It is actually possible to spend your way through a crisis , as so clearly shown by the American “New Deal” during the 1930s.
However, there is also some good news. The government’s mass vaccination programme has demonstrated early successes with vaccine approval, procurement, distribution and deployment, with over 15 million citizens receiving their first dose of vaccine by mid-February. Much hinges on the effectiveness of vaccination in slowing down transmission of the coronavirus and reducing Covid-19-related hospitalisations and deaths. There is also the caveat that the UK’s Joint Committee on Vaccination and Immunisation has chosen to go its own way, delaying the second dose of vaccine by as much as twelve weeks, unlike any other nation on the planet. The hope is that the scientific rationale for this decision will turn out to be the correct choice in the end.
There are many uncertainties along the path to the UK’s economic recovery, and these are reflected in the many different predictions being put forward by policy think tanks, corporate financial services institutions, and assorted economists, each with their own take on the trajectory of economic recovery. Notwithstanding the many different forecasts, there seems some agreement that it will take time, at least two years at the minimum, for the UK economy to bounce back to pre-pandemic levels. And a lot depends on the citizens themselves. Unless consumer confidence is regained, a reopening economy many not necessarily respond like a “coiled spring”, as predicted by Bank of England deputy governor Andrew Haldane on the basis of a supposed desire to dispose of increased savings that many have built up during the pandemic. Nevertheless, in difficult times we need to remain optimistic, as only positive thoughts can give us hope in the face of an uncertain future. Who really knows where we will be the same time next year?
Ashis Banerjee