The furlough and the business support schemes, started in March, would end in October to coincide with the reopening of the economy. This meant that the UK economy would be much the same -give and take some minor “scarring”- in 2021 as it was in 2019: a year’s growth lost, but that was the limit of the damage.
The expectation of a fourth quarter bounce-back was always unrealistic: severely damaged economies never “bounce back” unaided. The Chancellor’s response to the “second wave” of infections and lockdowns in October/ November was, in essence, to extend his March 2020 job retention measures until next March. The “V” was becoming more like a “U”, the scarring would be worse, but the assumption seems to have been that very little extra support for businesses and jobs would be needed after March 2021. The £280bn spent :getting the country through COVID-19″ would have been spent; the fiscal task ahead was to start paying it back. Revenue would automatically increase as the economy returned to “normal”, but most the hugely expanded deficit would have to be reduced by raising taxes.
“The expectation of a fourth quarter bounce-back was always unrealistic: severely damaged economies never “bounce back” unaided.
The main realisation underlying the Chancellor’s new spending review yesterday, 25 November, was that this second, less rosy, outcome was not going to happen either. The Office of Budgetary Responsibility (OBR) now forecasts that the UK economy will be 6% smaller, and unemployment twice as large, in 2021 than it was before the pandemic hit. It was therefore necessary to switch tack from waiting for economic life to awaken from its frozen slumber to jolting it back into life by positive action. In addition to the money already spent or pledged, Rishi Sunak has promised an extra £55bn to fund those public services in the front line of the fight against COVID-1, especially the NHS.
More interesting, from the economic point of view, are the pledges around investment in future job creation. Capital spending next year will total £100bn, £27 bn more than in 2019-20; and local authorities will be able to bid for projects to improve what Sunak called “the infrastructure of local life”: a new bypass, upgraded railways stations, less traffic, more libraries, museums, galleries, better high streets and town centres. The Chancellor has also promised a National Infrastructure Bank, headquartered in the North of England, and tasked with working with the private sector from next spring onwards to finance major new investment projects across the UK.
“The government reacted to the pandemic by putting sticking plaster over the temporary wounds it inflicted on the private economy.
All of this represents a considerable revolution in thinking, but without the new language which would make this obvious. The new programmes are tagged onto the old programmes, with bits of extra money for them. This is partly because the Treasury’s thinking is still evolving; partly because a Spending Review is not the place to announce a new relationship between the state and the economy. But this is the logical consequence of the Chancellor’s announcement.
The government reacted to the pandemic by putting sticking plaster over the temporary wounds it inflicted on the private economy. What Sunak’s new measures implied was that, in future, the state is going to play a much more active role in maintaining the patient’s health. The accelerated and expanded capital investment programmes (together with the announcement of a National Infrastructure Bank) amount to a reassertion of the state’s investment function, which had withered away after the Thatcher revolution. The endorsement of local authority job creation schemes, together with the expansion of Kickstart, implies that the state cannot, and will not, in future be indifferent to the scourge of unemployment.
“These are only tentative gropings towards a new economic philosophy.
At the moment these are only tentative gropings towards a new economic philosophy. Thatcherite neoliberalism was all of a piece. It held that provided inflation was avoided, the market system could be expected to produce the best outcomes, in the short-run and the long run. This encompassed a global market; it included indifference to the distribution of wealth and income. In the neo-liberal nirvana, everyone received the “right” rate for the job.
The new philosophy is only half formed. It lacks a language of public responsibility; and it has too many missing paragraphs. Crucially, what should be the role of the financial system, and what measures should be taken to chain it to responsibility? How can a system of national protection be made compatible with market-driven globalisation, which make national prosperity dependent on global supply chains over which no one has any control? What steps can, or should, governments take to prevent cost-cutting automation from destroying jobs, livelihoods, and communities?
These are the questions which leaked out from the accountant’s words of 25 November. They will not go away.
Lord Skidelsky is emeritus professor of Political Economy at Warwick University; and author of a prize-winning biography of the economist John Maynard Keynes.