I have today submitted evidence in response to the Treasury Committee inquiry on the economic response to Coronavirus Here is one of the main points I made in my submission.
I argue that UK government policy is confused because it fails to distinguish:
- Relief The immediate and pressing task of protection from the economic impact of the public health measures taken to confront the pandemic (absorbing and redistributing the costs of the ‘lockdown’).
- Reconstruction finance. The subsequent task of rebuilding and restructuring the economy, as the public health measures are eased and long-term impact of the pandemic with continuing social distancing measures and changed behaviour becomes clear (adapting to the new normal).
Relief and reconstruction finance are different in nature. Relief is about redistribution to cope with emergency. It is therefore a state responsibility with the costs falling on the public purse. Reconstruction is primarily, at least in most areas other than infrastructure, a private sector responsibility. Here the role of the state is to co-ordinate and support, including as appropriate guarantees and subsidies.
An illustration of our confusion between relief and recovery is in the flawed design of the misnamed “Corona Virus Business Interruption Loan Scheme” or CBILS for smaller firms with revenues of up to £45mn. The program is designed as a bridge to the new normal, offering six-year loans and with the lending banks required to assess the viability of the business plans offered by companies applying for lending. These are reconstruction loans. But a public health hurricane has struck and businesses are being asked to borrow money in order to repair the damage. In many cases levels of borrowing that even with a first year interest subsidy (a small element of relief) they cannot afford to repay. They also therefore also need relief as well as partially guaranteed reconstruction loans.
There are major questions about what level of relief should be assessed i.e. to what extent loss of revenue should be absorbed by employees, by suppliers and by investors/ shareholders. There are particular cases which would require a separate approach to computing relief. There are also substantial practical questions about getting the money out the door as rapidly as necessary. It is though certainly doable. My NIESR paper provides a sketch of what could have been done. Something along these lines can ensure that relief is not arbitrary and goes to all the profit and non-profit organisations and individuals whose incomes are so badly impacted by the lock down.
This confusion between relief and reconstruction has resulted in four glaring problems with the economic policy response.
- Relief has been provided in an arbitrary manner, responding rather randomly to political pressure (startups, really, why?, they are small, so relief can be provided within the existing schemes for small companies) while at the same time denied to others (e.g. , a major problem for our cultural industries where much activity is carried out by sole director companies without employees; also for charities)
- Relief is the economic cost of the lockdown. The longer the lockdown continues the more relief is needed. Reconstruction (which follows the easing of restrictions) does not depend on the lockdown and its easing. Because we fail to distinguish and adequately fund relief, we have no proper measure of the economic costs of lockdown measures. This in turn means that our entire public health policy in response to the pandemic and the crucial task of developing an appropriate road map to exit lockdown are being constructed in ignorance of the associated economic costs. This is not sustainable. To ensure political and public support for the continued lockdown will be accepted, requires adequate and continuing protection of livelihoods.
- Because we have not fully thought through the economics of coronavirus, distinguishing relief from recovery, we are also getting confused about the required economic measures as we reduce our public health and social distancing measures (winding down of relief) and transition into a rebuilding of our economy with different and potentially long lasting changes in patterns of spending (requiring a winding up of support for recovery).
- Relief can (here I am more controversial) be financed to an important degree out of current revenues through emergency tax levies. We are both underspending (on relief) and at the same time overborrowing (not levying sufficient emergency taxes on those sitting at home unable to spend salary). Reconstruction requires public borrowing to stimulate the economy and support recovery. We are borrowing too much now limiting our ability to stimulate from the autumn onwards as we move to recovery and reconstruction. I have not yet had time to express this argument in a research paper, but I do have a working title “Pandemic relief: the requirement is a money heli-hoover not helicopter money”.