Many people argue that the Covid crisis has demonstrated the need for government to take a bigger role in the economy, in good times as well as bad. When asked to suggest five policies to help the recovery their ‘wish lists’ are therefore full of ways in which the state could do even more. In my view, this draws the wrong lessons.
For a start, the track record of ‘big government’ during the pandemic hasn’t been great. There have been some major successes, notably the rollout of the vaccines (helped by an army of superb volunteers). But many programmes have not gone so well, including ‘Test and Trace’ and the procurement of PPE. In general, decentralised healthcare systems with higher degrees of private sector involvement, such as in Germany, have performed rather better.
What’s more, the surge in public borrowing has mainly taken the form of transfers to private households and businesses, rather than higher spending by the government itself. This additional support was surely the right response to a health emergency where markets were effectively shut down. Nonetheless, it tells us little about the appropriate level of state intervention in more normal conditions.
Indeed, there is already plenty of evidence that, as and when the government does take off the brakes, the economy will rebuild itself without needing much more help. It seems a long time ago now, but remember that GDP was rebounding more quickly than most had expected last summer after the first lockdown was eased and before the second ripple of the virus turned into a wave.
The UK’s relatively flexible economy has proven itself to be highly adaptable, as seen in the boom in online spending and the switch to homeworking. And, of course, it is competing private companies that have created the game-changing vaccines. Capitalism and the profit motive are perfectly compatible with socially responsible behaviour and community spirit.
So, what are my alternative five ways to rebuild the economy?
First, let labour markets work properly again. It does make sense for the government to protect jobs and incomes while there are still substantial restrictions in place. I would therefore wind the furlough scheme down gradually by the summer, rather than end it completely in the spring, and extend the improvements to Universal Credit. But then that should be it: no more subsidies that simply distort incentives and hold back essential adjustments in the economy.
It’s also important to push back against the assumption that the government should be in the business of guaranteeing employment, or boosting real wages. Public investments in infrastructure or ‘green’ projects should stand or fall on their own merits, rather than as job creation schemes, and we should always ask whether there is a better market-based solution.
Second, stop talking about tax hikes to ‘pay for Covid’. At best, the revenue raised could only make a small dent in the additional borrowing. At worst, raising taxes prematurely would hold back the recovery. Better to extend existing tax cuts, or add to them. If lower taxes work for Freeports, why not for the whole of the UK?
Raising corporation tax would be a particularly bad idea. The burden would largely be borne by consumers in the form of higher prices, or workers as lower wages. The fact that UK corporation tax is relatively low isn’t a good reason to raise it either. If other countries want to have higher rates of what almost all economists agree is a bad tax, then why not let them?
Third, make the most of the opportunities presented by Brexit. In the short term, the priority should be to minimise the additional costs caused by the new barriers to trade with the EU. But we shouldn’t lose sight of the upsides either. The faster rollout of the Covid vaccines illustrates the benefits of breaking away from the EU’s orbit.
Liz Truss and the Department for International Trade have rightly been praised for the speed at which they have rolled over (and in some cases improved) the trade deals that the UK had with third countries as a member of the EU. The next step is to negotiate new deals, including early accession to the Trans-Pacific trading bloc.
At home, Kwasi Kwarteng and the Department of Business, Energy and Industrial Strategy (BEIS) will hopefully accelerate the process of reviewing the rules and regulations inherited from the EU and deciding which are worth keeping. Many will be, but many will not.
Fourth, allow more houses to be built. Planning reform is often disparaged as a boon for property developers and a threat to the environment. In fact, tackling the housing crisis should be a central part of any anti-poverty strategy. Sometimes economics really is simple: increase the supply of homes and the cost of living will fall.
Together, these four proposals should do more to create jobs, encourage investment, boost productivity, and increase real wages than any amount of public spending and increased state intervention.
Fifth, and finally, change the narrative. Rather than undermining confidence with dire warnings of worse to come, the Chancellor should be more positive. This isn’t mere ‘boosterism’. There is already a huge amount of fiscal and monetary stimulus in place, and plenty of pent-up demand to fuel both consumer spending and business investment. Many feared that unemployment would already be twice as high as it is now. Even the latest data on the public finances were not as bad as the OBR had been expecting.
Once the government is able to step back, we should again be pleasantly surprised at how well the UK economy recovers.
This piece was first published in the Daily Telegraph (25th January 2021)