The coronavirus job retention scheme is the biggest step the Chancellor has taken so far, both in terms of its nature (subsidising the wages of millions of private sector worker) and cost (potentially many tens of billions of pounds). This raises three questions. Is this degree of state intervention justified? What more is needed? And how will all this support eventually be stopped?
The first of these questions is relatively easy to answer. The government has made the exceptional decision to shut down large parts of the market economy to save many thousands of lives. It is only right that this is matched by exceptional policy responses to protect businesses and jobs, and thus prevent a temporary economic shock from becoming a prolonged depression.
The new wage subsidy scheme is cleverly designed. The Institute for Fiscal Studies has argued that it might encourage businesses to concentrate work among a small number of employees and furlough the rest, rather than sharing it more evenly. But that may be exactly what ‘social distancing’ requires. Firms would also struggle to continue to pay full wages to employees who are only occupied part time. It makes more sense to allow those who most need to stay at home to do so, with the government covering most of their wages until the crisis passes.
The financial cost is also bearable, especially compared to the alternative of doing nothing. Assuming the average wage subsidy is £1,500 per person per month, and this lasts three months, the bill would be around £4.5 billion for every million jobs protected (less whatever the government saves on unemployment benefits and eventually gets back in taxes). Other economists have suggested slightly lower numbers. But all seem to agree that, depending also on how many jobs are covered and how long the scheme lasts, the total upfront cost could run into the tens of billions.
However, that’s not actually a huge amount in the grander scheme of the public finances. Put another way, wage subsidies and other similar measures could still cost less than the £58 billion that Labour was proposing to borrow to compensate women affected by changes in the state pension age, regardless of individual need. I think I know which makes more sense.
Emergency economic policies, and the knock-on effects of the inevitable economic slump on tax revenues, could see the overall budget deficit balloon again to the peak of ten per cent of GDP reached in 2010, in the wake of the global financial crisis. The stock of debt could hit 100 per cent. However, as others have pointed out, both government borrowing and debt have been much higher in wartime, which feels like the right benchmark now. As the Charts below show, annual borrowing exceeded 25 per cent of GDP in the 1940s, and debt peaked at nearly 260 per cent.
The second question – what more is needed – is harder. The economic policy responses are barely keeping up with the health measures, and some gaps remain. Some industries, such as airlines, may also need specific rescue packages. The self-employed in particular will need further support. Some will get extra help from means-tested benefits, some from delayed tax bills, and some from mortgage breaks, but for many this will still not be enough. The next step may well be some form of unconditional cash payment, whether targeted at the self-employed, or distributed more widely.
The third question is how this will all end. Given how popular it is to blame ‘capitalism’ for all the world’s other ills, from wars to climate change, it is no surprise that some have been quick to pin the current crisis on the failures of free markets too. Many have also used the need for unprecedented intervention as evidence that the state should play a much bigger part in normal times as well.
This is disingenuous. What we are seeing now is simply an example – albeit an extreme one – of the job that the state has always been expected to do. Even the fiercest critics of the ‘nanny state’ would agree that public health cannot be left entirely to the markets. The risk of a great many deaths from coronavirus is a textbook example of serious negative externalities that can only be dealt with by collective action.
Most economists would also agree that fiscal policy can sometimes need to take a more active role in responding to economic shocks, especially when monetary policy is less effective. But a counter-cyclical increase in government spending during a downturn is very different from a permanent and structural expansion in the size of the state, regardless of the circumstances.
What’s more, the new economic measures are designed to be temporary. At some point, hopefully soon, the restrictions to protect public health can be lifted and the normal functioning of markets can be restored. Wage subsidies would then no longer be needed, loan schemes can be wound down, and so on.
Finally, the measures are not as big a change to the capitalist model as some socialists might like to think. For example, it is still private businesses that are employing people, even if the state is picking up a large part (not all) of the wage bill.
Similarly, while the government and the Bank of England have provided a large amount of additional cheap finance and loan guarantees, it is still private businesses that are doing most of the lending, borrowing, and spending that is being facilitated by these measures, and not the state.
This distinction needs to be drummed home. The emergency response to coronavirus hasn’t opened the door to a socialist planned economy. Thankfully.
This blog is a slightly amended version of an article published in the Sunday Telegraph on 22nd March 2020
Plain-speaking Economics 