UK Chancellor of the Exchequer Rishi Sunak is working on a 10-year post-Covid economic plan
It’s a year since the Covid-19 mutation started spreading and governments everywhere acted to contain it.
More than 2m people globally have since died due to Covid. More than 100m are estimated to have contracted it.
There’s consequently euphoria about anti-Covid vaccines that in the UK are being dispensed at the rate of more than half a million a day. Most British adults at this rate will be vaccinated by Easter. Bank of England governor Bailey said on 4 February that he was confident the UK economy will quickly recover once the majority has had the vaccine.
And yet, The Times reported on the same day that UK Chancellor of the Exchequer Rishi Sunak is preparing a 10-year Covid economic recovery plan that will entail a long-term increase in government spending and the deficit.
So what’s going on?
There’s no doubt that the response to Covid has had dramatic economic consequences. US GDP last year recorded its sharpest fall since the 1930s. UK GDP which was down 10 per cent last year and will contract by a further 4 per cent in the first quarter before rebounding.
…Conventional economic logic is colliding with electoral reality…
But a moment should in due course arrive when governments will not only stop the exceptional additional spending measures Covid policies required. They will start rolling them back.
This is where conventional economic logic collides with electoral reality, and comes off worst.
Unemployment in the US tripled last year and is up everywhere. Covid has made millions poorer, throwing some into destitution. And yet it seems that many in advanced economies have done very well during Covid.
It’s estimated that UK personal savings due to Covid – mainly the result of people cutting consumption and travel – amount to $200bn. A happy young office worker interviewed by the BBC said that this has enabled her to save up enough in the past year to pay for a deposit for a home she would not previously been able to afford.
Equity prices almost everywhere are up and the US share index hit a record high in January. President Trump authorised exceptional federal spending. Much of this has coalesced with higher savings to drive equities up. Property is also higher. London house prices reached a record high last autumn.
So if you have savings in shares, property or both, you are probably significantly richer now than you were last March.
But there’s good news for debtors too. Dollar interest rates are close to zero and negative in real terms. On 4 February, the Bank of England gave UK’s commercial banks six months to be ready for the possibility of cutting interest rate below zero. This is great news for people who owe money and an irresistible incentive for those without debts to borrow either to spend or invest in soaring equities and property. Both are forecast to continue rising in the UK.
It’s therefore possible most British households have more wealth and experienced no loss of income due to government protective measures during the epidemic.
Add to this the pleasures many are deriving from working from home, thereby avoiding the chore of rising early and preparing for work before setting off on long commutes. People who rarely saw their children have spent almost a year in their company and many have enjoyed it.
And finally, there are the really big winners: the technology firms like Google and Amazon which have been lifted by soaring demand for online services.
…Calls for spending cuts aren’t being voiced or heard…
There are laments about Covid’s negative impact on people living alone, in insecure employment and without decent homes. The families of those that have died will forever recall the Covid era with sadness.
And yet, many in advanced economies are secretly enjoying its most unexpected by-product: a huge economic windfall that is benefitting in particular better-off and older people. They were Covid’s most probable victims but they are also most likely to vote.
As the present Covid mutation dies off due to lockdowns and vaccinations, you’d expect calls for government action to reduce spending and deficits and raise taxes. But these aren’t being voiced, even by the normally fiscally-cautious IMF, or heard by governments fearful of the electoral consequences of ending what has been a golden moment for influential groups: the wealthy, property owners, debtors and people aged over 60.
Covid is on its way out.
Covid economics may is more difficult to kill and may never die.