Huge uncertainty about the scale of the corona crisis means the Chancellor’s job is far from done

The Government must take further radical policy steps to strengthen its economic response to coronavirus amid huge uncertainty over the length of the outbreak, and the economic and fiscal costs entailed, according to a new report published today (Thursday) by the Resolution Foundation.

The report – Doing more of what it takes – draws on evidence from previous pandemics around the world and real-time data on the impact of coronavirus in the UK to model a range of scenarios on the economic and fiscal impact of the outbreak, including three, six or 12-month lockdowns.

It notes that having made two big policy decisions – to close down sections of the economy, and socialise the cost of doing so with a £400 billion support package for firms and workers – the Government must go further to prepare new policies, and refine existing ones, amid uncertainty about the scale of the crisis the UK ultimately faces.

The report says that while the UK is currently experiencing a far sharper downturn than even the financial crisis, a deep but ‘V-shaped’ recovery with relatively little medium-term damage (3 per cent of GDP) is possible if social distancing restrictions are limited to three months. However, if a six or 12-month lockdown is necessary, it could mean a far longer recovery of between 2 and 5 years, and a permanent GDP hit of 5-7 per cent.

Falling employment will be a renewed challenge for policy makers in all scenarios. With around a third of the private sector workforce currently estimated to be without work and furloughed, a longer lockdown could result in up to half being without work.

The report notes that a six-month lockdown could result in unemployment averaging five million in 2021 as the Job Retention Scheme is phased out – far exceeding the peaks seen during the 80s and 90s recessions.

The lockdown will also have a huge impact on the public finances. The Foundation’s analysis shows that a three-month lockdown could see the deficit surpass its financial crisis peak and hit 11 per cent, while a 12-month lockdown could see the deficit reaching 38 per cent – its highest level in history.

The Foundation cautions that the economic impact of a longer lockdown does not mean there is a simple trade-off between health and economic responses to coronavirus. Lifting the lockdown too early could lead to flare up of new cases and re-imposition of restrictions, prolonging the economic and fiscal damage.

What tensions do exist between the government’s public health and economic objectives can also be mitigated by:

  • Reforming the Jobs Retention Scheme so that furloughed workers can return to work part-time work if this can be done safely;
  • Providing clearer guidance to different sectors of the economy about what work can be conducted safely while social distancing restrictions remain in place;
  • Preparing to tackle higher unemployment through more active advice, training, and support who find themselves without a job following the lockdown;
  • Ensuring Government can finance its essential fiscal support by setting out a transparent, time-limited framework for monetary financing via the Bank of England; and,
  • Protecting fiscally sustainability once the recovery is secured with a revised fiscal framework and tax rises for those least affected by the crisis, rather than renewed austerity for those who have borne the brunt of it.

Richard Hughes, Research Associate at the Resolution Foundation, said:

“The UK is currently experiencing a public health emergency which threatens lives and livelihoods. The Government has made two bold, but necessary, decisions to combat coronavirus by closing down sections of the economy and socialising the cost of doing so.

“But it will need to make many more big policy changes to ensure the current strategy is sustainable amid huge uncertainty about the scale and duration of the corona crisis.

“The Government must prepare for a scenario in which the numbers of people out of work could far exceed the levels experienced during the 80s and 90s recessions. With the Jobs Retention Scheme already far more widely used than originally expected, the Government must ensure it is flexible enough to cope with a longer lockdown, and potentially even greater demand.

“As well as refining its crisis response, the Government must also plan a sustainable recovery. In doing so, Ministers should remember that young people and low-paid workers have borne the brunt of the crisis, and will need to be at the heart of support to get the economy back on track.”