It’s time to champion the visible hand

The government’s mini summer budget announced last week, reveals a stubborn ideological commitment to the free market above all else. The Chancellor’s failure to develop a significant plan of new spending suggests he is still betting on a V-shaped recovery. This wholly underestimates the profound nature of the crisis in which ongoing uncertainty prevents households and businesses from returning to their pre-crisis behaviour. 

There has been much talk about the scale of the government’s interventionist response to the pandemic, and the Prime Minister’s rhetoric of a New Deal-esque spending plan. Indeed, the UK is expected to face the biggest budget deficit in peacetime history.  However, there remains a growing gap between stated policy intention and actual reality. The £5 billion of spending announced by Boris Johnson and reaffirmed in Sunak’s summer budget, amounts to merely 0.2% of 2019 GDP – this dwarfs in comparison to the 40% of GDP spent in the US during the New Deal of the 1930s. Critically, Roosevelt’s New Deal went far beyond spending alone, it also set up institutions to channel private investment into socially useful public projects. While spending is necessary it is not sufficient. The government’s pick and mix spending plans reveal a strong attachment to the invisible hand rather than a strategically focussed stimulus programme. Given the government has pledged to ‘build back better’, the goal should be to shift our economy towards a fair and green transition, and to reverse decades of economic and social inequalities.

Sunak’s mini budget offered a further £30 billion in measures to support the economy, on top of £160 billion pandemic-related measures announced since March. Only £8.6bn is earmarked as public spending. This is not new spending but previously announced spending brought forward. The total fiscal injection amounts to 8% of GDP as of June 2020 but remains lower than many other major economies such as Germany (9.4%), Australia (9%), US (12.3%) and Japan (11.3%). While the numbers appear large, these measures amount to kicking the can down the road for another six months. They are temporary or one-off gimmicks rather than the long-term investment plans we need to create a resilient economy. No doubt, this is intentional in that the government hopes the economy will be back to business as usual by January 2021.

Figure 1:  Breakdown of £8.6 billion accelerated government spending announced on 8 July 2020

Source: https://www.resolutionfoundation.org/app/uploads/2020/07/RF_SEU_slidepack.pdf 

The pandemic has significantly changed people’s opinions about the type of economy they  want to live in. Just 6% of people want to go back to our pre-pandemic economy. A poll we conducted found that 82% believe that during the crisis, the UK should prioritise the health and wellbeing of citizens, above the pursuit of economic growth. But following weeks of clapping for NHS and care workers, the level of spending announced for hospitals came to an abysmal £1.5 billion. This falls far short of meeting public demand for better health and public services in the light of the pandemic.

However, the biggest chunk of spending from the recent fiscal statement is directed towards employers, to encourage them to hold onto workers when the furlough scheme ends in October.  In addition, there are measures aimed at boosting consumption as lockdown is eased. This entirely misjudges the nature of the crisis in which consumer demand and business investment has contracted due to uncertainty. The Job Retention Bonus scheme offers £1000 to employers willing to keep furloughed workers on until January 2021. This is effectively a windfall for companies already able to bring workers back but for those companies that are struggling or who have already gone under, there is no benefit at all. The bonus barely meets employers’ wage costs for the six months period it will be in place. The Kickstart jobs scheme is intended to create 300,000 jobs for young people. The government will cover the costs of 25 hours’ work a week for 16 to 24 year olds on Universal Credit. This is also a temporary measure for just six months and only offers the National Minimum Wage, £4.55 for under 18s, £6.45 for 18 to 20 year olds and £8.20 for 21 to 24 year olds. We question, along with others, the value of offering short term job placements at such low wages. Ultimately, we need a well-funded state-led jobs programme that is strategically aimed at sectors which will need to be prioritised in the future – the government’s response comes nowhere close to this required level of ambition.

Measures to boost spending in hospitality sectors such as the Eat Out vouchers for £10, are another gimmick that look set to only benefit middle and high income households. This is unlikely to impact spending significantly as fears of a second wave hang over the winter period. Until people feel safe to use public transport and return to work, many high street businesses will not recover. Despite the opening of non-essential shops in June, the British Retail Consortium announced shopper numbers were down 53% compared to June the previous year.

Ultimately the Chancellor’s measures are unlikely to have any lasting impact as they depend heavily on a gamble that the economy will miraculously recover by itself. Rather than relying on the market, we need the government to wield a strong visible hand and ensure public spending is directed to strategic sectors that benefit everyone in the UK, not just an already privileged minority. The failure to make bold choices about spending also reflects the ongoing misplaced concerns regarding the need to balance the budget, as well as the possibility of inflation on the horizon depending on the path of recovery.

The pandemic is an opportunity to reimagine the economy and shift away from an over-dependence on financial markets fuelling asset price inflation and high-carbon emitting industries. The Government vowed to build back better but fails to see the role of the visible hand in achieving this promise. We need large-scale strategic interventions that support a long term vision of the economy in line with the desires of the public – for an economy based on need not greed.