Coordination between the Treasury and the Bank of England is welcome, but in the midst of a crisis, more private debt is not the answer. The immediate economic response needs to involve targeted measures to protect the most vulnerable, while longer-term interventions should be focused on radically restructuring our economy.
In an embattled speech where Sunak told the public that “this is a time to be bold, a time for courage”, he fell short of delivering on the targeted support that the public urgently needs. As people are already losing their jobs, and businesses face deep uncertainty about the future, the Chancellor has offered to saddle the private sector with more debt.
Sunak’s flagship policy on Tuesday was 330 billion in government-backed loans for struggling businesses. For larger firms, the Treasury will deliver support in coordination with the Bank of England through a new Covid Corporate Financing Facility that will provide low-cost, easily accessible commercial paper. While further coordination between the Treasury and the Bank of England is welcome, the policy itself misses the target.
Loans and commercial paper purchases won’t satisfy the public’s immediate needs. In the face of deep uncertainty regarding future revenues and commercial viability, businesses will be hesitant to take on more debt, and some may not even be able to lawfully do so. For those that do make use of the new measures, this will hardly stem the long-run pressure to drastically cut costs by laying off workers. Ultimately, small businesses and workers are still being left out to dry.
The government is operating a painfully incoherent response to the crisis, as the Chancellor and the Health Secretary pull in opposite directions. While Matt Hancock is saying that we must protect people’s lives by engaging in the necessary social distancing and self-isolation measures, Rishi Sunak’s package will force many workers to choose between disregarding the safety measures and facing severe financial hardship.
Surely, doing ‘whatever it takes’ does not involve abandoning people in the impossible situation of choosing between: i) going to work and possibly putting themselves, loved ones, colleagues, and commuters at risk of infection; or (ii) failing to pay rent and put food on the table. The Chancellor needs to step up and provide direct income support for those suffering from a loss of income from coronavirus and related containment measures. This should be the immediate priority – no questions asked.
More emphasis on direct grants for small businesses – with conditions to keep workers on payroll – would also be far more sensible than the current approach that is excessively dependent on an increase in the private sector’s stock of debt. The illusion that the government is financially constrained is already being shattered. It has the capacity to support small businesses and the most vulnerable directly, and the Bank of England can support their efforts if need be.
The government will also have to grapple in the relatively near future with some broader economic issues, including the possibility of a financial crisis. Bank stocks are plunging around the world despite liquidity injections, and loans will increasingly go bad. If banks go under, we don’t want to be in the same position as 2008, where bail-outs were necessary to restore the functioning of our system of payments. The Bank of England and the Treasury need to pre-emptively protect us against this situation by implementing a Central Bank Digital Currency (CBDC).
CBDC is a form of digital cash managed by the central bank directly. Right now, if banks fall into negative equity, our access to means of payment will be threatened, as was the case in 2008. In other words, private bank insolvencies would freeze the vast majority of economic activity. A CBDC can prevent this from happening, as our digital cash would be safely stored in a system managed by the central bank, protected from insolvency and systemic failures of the private financial sector. Implementing and launching CBDC should therefore be a priority of the Bank of England, to pre-emptively fend off the consequences of a possible financial crisis and potentially support measures involving direct cash transfers.
The crisis also highlights an important point to be made about the goals of economic policymaking. The economic fallout of the virus is making it painfully clear that the government and the basic structures of our economy are far too hooked on GDP growth. Many commentators have rightly highlighted that in the immediate response to Covid-19, stimulating economic activity could dangerously amplify the spread of the virus. But even in the long-run, we must not return to a misguided pursuit of economic growth beyond ecological limits.
The current slowdown of economic activity is unveiling something that ecological economists have been stressing for years: GDP and environmental pressures are tightly coupled. As GDP is falling, even in such a short period of time, we’ve already seen drastic reductions in GHG emissions, resource use, and the revival of ecosystems. Decoupling environmental pressures from economic growth has proven to be a failed project, so focusing on economic stimulus to ‘reboot’ the economy as the threat of the virus subsides would be a dangerous mistake. If we go down that path, we’ll be right back on the fast-track toward irreversible climate and ecological breakdown.
This is the time to fundamentally rethink our economic structures, and what purpose they serve. Do we want to promote the health and wellbeing of the public and our environment? Or will we continue to fuel commodification, resource extraction, productivism and consumerism? If we choose the former, escaping our dependency on growth will need to be placed far higher up the political agenda.
In the coming weeks, we will be offering specific recommendations on how to end the growth paradigm, and transition to an economy that supports wellbeing within planetary boundaries.