The UK is set to face a significant economic shock, regardless of how long the Coronavirus lockdown lasts, with higher taxes and the tax treatment of different forms of work likely to dominate post-outbreak discussions on how to rebuild the economy.
Those were some of the areas considered in an online event hosted by the Resolution Foundation think-tank this week (you can view the full event by clicking here.)
Moderated by the foundation’s chief executive, Torsten Bell, the panel comprised:
Richard Hughes - Research Associate at the Resolution Foundation
Stephanie Flanders – Head of Bloomberg Economics
Adair Turner – Senior Fellow at the Institute for New Economic Thinking and Former Chairman of the Financial Services Authority
Richard Hughes began by setting out some of the main findings of the Resolution Foundation’s new report on the economic impact of COVID-19, Doing more of what it takes.
The report models the potential economic impact of a three, six and 12-month lockdown on the British economy. It suggests:
- Falls in gross domestic product (GDP) of between 10 and 24 per cent, the largest fall in 300 years
- Government borrowing will increase to more than 100 per cent of GDP in each of the lockdown scenarios
- An ‘affordable’ debt burden that is due to low interest rates, but vulnerable to future interest rate and inflation increases
To help mitigate the economic impacts of the lockdown, the foundation has recommended that the government to make its job retention scheme more flexible so that it provides partial salary support to enable part-time working.
It also wants the government to consider writing off loans to businesses who rehire staff post-outbreak and for the government to retain collateral in firms that repay their loans, but lay off staff.
With government heading for borrowing levels unseen since the two world wars, Richard Hall suggested that the government would need to move away from monetary financing towards market financing.
He also suggested that it alleviate the challenge by revising its fiscal framework and considering a debt down payment by way of a surcharge tax on higher earners, many of whom will be continuing to earn while spending less during the lockdown.
Stephanie Flanders said the government had responded well to the challenge of mitigating the economic shock of the shutdown but added that in the longer term, questions remained around its ability to scale up support (if necessary) and ensure it minimises the number of people that ‘fall through the cracks’.
She cited a number of figures that helped paint a picture of the extent of the challenge the world was facing. In France, stringent lockdown measures have led to a 35 per cent reduction in output while decisions to close schools could, in isolation, contribute a 10 per cent reduction in output.
In a stark comparison, Flanders suggested that decisions to cancel large scale public and sporting events alone in 2020 would have the same impact on the economy as the 2008 financial crash in its entirety.
However because nations around the world were learning and responding to the challenges at the same time, the UK was not alone. As a result, she said that we should expect to see this reflect in the way that financial markets respond (in other words, it could be much worse if we had to face up to this crisis alone, rather than being ‘all in it together’).
Adair Turner struck a more positive tone as he set out a series of principles that the government could follow as it seeks to reopen the economy and ease lockdown restrictions.
He rejected the 3/6/12 month modelling criteria used by the Resolution Foundation as ‘deeply unrealistic’ because political and social pressures made extended lockdowns unlikely.
Turner added that the government needed to work out how, on a sector-by-sector basis, how it could reopen the economy while ensuring that steps remained in place to maintain social distancing and mitigate the spread of the virus.
He suggested that factories and shops could reopen and that apps could be developed to allow people to pre-book visits to museums. He also said that income maintenance programs such as the job retention scheme enable people to participate in other sectors of the economy where labour supply is required.
Questions from the audience included whether it was time for Universal Basic Income to be considered (Adair Turner said this was unlikely, nor necessarily desirable) and the potential impact on the housing market (Torsten Bell said the impacts were less likely to mirror the 1990s housing crash and were most likely to impact renters in high value properties).
Participants also asked how the UK would pay for its pandemic response and whether this would lead to further austerity.
In a final question, on whether and when the rich would be taxed to pay for the response, Stephanie Flanders said that while tax rises were possible in the future, the broader question that was likely to dominate discussion came in the form of the equalisation of the tax treatment of different forms of work.
When launching the government’s economic response to Coronavirus, chancellor Rishi Sunak hinted that this could be a subject for future discussion.
During the course of the event, attendees were asked to participate in three polls.
In the first, 49 per cent of participants said they believed that social distancing measures would stay in place for 6 months, compared to 39 per cent who said they would remain in place for 3 months, and 12 per cent, for a year.
A second question on the government’s measures to support family incomes found that 53 per cent felt the measures had ‘been about right’, with just 2 per cent saying they had ‘gone too far’. 44 per cent said the measures did not go far enough.
The last question, on the government’s post-pandemic economic response, saw 48 per cent of participants believing that it would lead to an acceptance of higher deficit/debt levels. A third (33 per cent) said the government would have to raise taxes, 16 per cent said it was likely to lead to spending cuts and renewed austerity, while 4 per cent said the government was most likely to respond by cancelling new capital spending plans.