The government needs to set out its stall on economic management, and there is not a moment to lose
Between March and July this year, 20 per cent of the UK’s economic activity was wiped out by Covid-19 and the social measures imposed to limit its ravages. In that time many of Britain’s biggest companies have been laying off staff and transforming their operations in response to the crisis with a zealotry that is impressive but also, from a macroeconomic perspective, somewhat terrifying.
In the same time period, the number of payroll employees in Britain declined by 730,000. Right across the country, companies are altering course – either in response to falling demand or new, digital ways of doing business. As one academic recently told Spear’s: ‘Companies used to have a five-year plan. Now they’ve got a five-month plan.’
And soon, the government must respond. The chancellor Rishi Sunak and his Treasury team might have cancelled this year’s autumn Budget, but they will soon need to set out the government’s stall on economic management.
There’s not a moment to lose.
Chief among the chancellor’s tasks must be to confront the horror of mass unemployment – the Bank of England forecasts that the jobless rate could swell to 2.5 million before the end of the year. If that happens, then Christmas will be cancelled in Downing Street – as well as in many unfortunate households across Britain.
But no government, especially a Conservative one, can wave a magic wand and create jobs. All they can do is intervene to create a fiscal and economic landscape that is congenial for their creation. It is time, then, to grasp the nettle of monetary policy reform and change the rules of engagement for the Bank of England, to give it more firepower in this age of rock-bottom interest rates.
Everyone knows that monetary policy is – if not broken – then close to it. Reforming the 2 per cent inflation target (perhaps raising it to 4 per cent or allowing past periods of underinflation to be carried forward so that higher levels are tolerated) should be as seriously considered in the UK as it has been in the US by the Federal Reserve.
Second, ministers must invest so that Britain’s productivity lag can be addressed, providing a boon to every man, woman, child and non-dom in the land. If Boris Johnson does really ‘build build build’ then he might be on to something. But we don’t just need shovel-ready construction projects.
We need quicksilver internet connectivity across Britain. The government’s investment should also be married to a broader commitment to speed Britain’s transition to a zero-carbon economy, as well as shoring up London’s lead as the global centre for green finance.
Third, the government must prioritise investment in education so that the productivity and economic growth of tomorrow are not hampered by the bean-counting of today. Government spending on education has fallen in real terms over the last decade. That must be reversed.
Likewise, the ‘triple-lock’ which ensures that pensions rise by at least 2.5 per cent is unsustainable, unfair and unjustifiable. It is just one policy that should be trimmed to allow greater investment in young people’s futures.
There is, as ever, the small matter of money, and finding enough of it to pay for all of this. Already the government is going to have to borrow more than £300 billion this year to fund the battle against coronavirus, bringing UK national debt to north of 100 per cent of GDP for the first time since 1963. So, taxes must rise. But, to borrow from Saint Augustine, not yet. And not by too much.
When Mr Sunak’s Budget comes, nothing must be done to harm what animal spirits are left after the devastations – human and economic – of Covid-19. Rather, the government must take advantage of the benign interest rate environment to borrow for tomorrow’s growth and manage any monetary risks accordingly in the future.
And, vitally, it must not scare away foreign entrepreneurs with talk of wealth taxes or other ‘innovations’. UK plc needs every penny – not to mention the jobs – that wealthy individuals and their businesses can bring.
Their intangible assets of dynamism and internationalism will be every bit as crucial to the Covid recovery, too.
This leader has been edited from the original, published in the September/October edition of Spear’s. To buy a copy, click here.