UK Chancellor of the Exchequer Rishi Sunak’s first budget, which called for the biggest increase in British public spending for 25 years, is a seminal moment for economic policymakers.
The plan for next financial year that he announced in the House of Commons on 11 March was almost exclusively justified by the need to protect British society and its economy from the direct and indirect effects of the Covid-19 pandemic.
There’s no parallel in British peacetime history.
He promised unlimited resources for the National Health Service (NHS) and said government expenditure in many areas will rise to counter the impact of the fear of Covid on private spending and investment.
Comment focused on the irony in the chancellor’s plans. Here’s a government returned in December in part because of its opposition to large expenditure increases announcing a bigger budget than its defeated rival would have done.
But the bigger truth is a new economic management paradigm is emerging. It is one which rejects in principle the fiscal rules and targets that have governed British budgetary policy for most of the past 40 years.
Critics say Sunak’s budget is mainly shaped by political expediency and opportunism. They have a point.
The ruling Conservative Party’s resounding 2019 general election victory was partly due to traditional Labour voters switching to the Tories. Brexit was perhaps the key issue for many. But Conservatives elected to represent constituencies that have never voted for them before are pressing for more investment in parts of the UK still bearing the scars of the de-industrialisation shock of the 1980s.
Sunak undoubtedly is being tactical. His budget shows the government’s serious and cares.
But the spending boost he’s approved can’t be a one-off for the simple reason that Covid-19, the third global coronavirus epidemic in 20 years, can’t be killed off. It’s with us, always.
Containment measures now being introduced must be indefinitely sustained until there’s an effective vaccination.Without that, Covid will return in due course and hit Britain as if they’d never happened.
And there is the certainty that the virus will mutate and re-emerge in a different and potentially more virulent form. Logically, if you’re prepared to act against a Coronavirus pandemic once, it follows you must be ready to do it again, and again.
For policymakers, the initial response is obvious. Ensure public health comprehensively covers the entire population and has sufficient spare capacity to deal with those falling ill as a result of a virus epidemic. Given that the disease is definitively social – it can’t exist unless it’s spread – conventional individual insurance models don’t work. Unless everyone is covered, no one actually is. You need social insurance.
That’s why Covid-19 is such a threat to champions of the healthcare status quo in the US and everywhere that depends upon individual health insurance in some form.
Almost 30m American’s don’t have health insurance and tens of millions more have limited or defective coverage. There could be no greater incentive for people to avoid seeking treatment and adopting social distancing practices recommended by health experts to contain Covid.
But even in the UK, birthplace of the world’s oldest free-at-point-of-use health system, longstanding assumptions are being undercut.
One defence of the NHS is that it delivers healthcare in the UK at half the cost but with better average outcomes than the American system does. There may not be much choice or competition, something conventional economics loathes, but the NHS is highly technically-efficient.
But if the NHS is expected to deal with a virus that can with little warning affect the entire population and kill up to 3 per cent of those infected, it must have massive spare capacity just in case. The reality, however, is that the NHS has few surplus intensive care beds. To make the NHS virus-ready, it needs much more money and, by deliberate action, consequently become less efficient. No conventional economist will easily concede this is a good idea.
But it goes beyond money. How can you provide doctors and nurses during a virus crisis if there are no spare skilled personnel ? And how can the NHS meet the soaring demand that pandemics create if clinical staff will get ill themselves? You will need a reserve army of technically-qualified people as well.
The problems aren’t confined to healthcare delivery. Social care provisions for the elderly and infirm are even more exposed. A high proportion of social care staff work outside a clinical environment, many are casually-employed and they are also often migrant workers, potential cross-border virus vectors.
Activities that are conventionally privately-owned face almost impossible challenges. Provisions will have to be made for all employees to enjoy sick pay from the first day off work either due to illness or for self-isolation. Companies will have to ensure places of work are frequently and properly cleaned and maintained. Many will have to shift to homeworking. Nobody knows how that will work when it’s done on a mass scale.
And then there’s the macroeconomic challenge. Fear of Covid-19 has rocked stock markets, discouraged consumer spending, particularly on services, and undermined the confidence making long-term investment decisions requires. The global economy will soon be in recession due to Covid.
Sunak’s budget is in part designed to counter these developments. But since a Covid attack can never actually be declared to be over, when should such stimulation end?
And because Covid and its successors can strike at any time, governments will permanently have to be poised to step in for further doses of reflationary treatment.
Of course, it’s impossible to make economies virus-proof. But that doesn’t mean you shouldn’t try.
It’s impossible to make them permanently unemployment-proof but that didn’t prevent policies promoted by John Maynard-Keynes from being adopted after 1945. And you can’t make them permanently inflation-proof either, no matter how passionately the late Professor Milton Friedman argued you could.
It’s all about priorities. Those are shaped by what matters most to the majority, not economic theory.
In the UK, and across the world, a new popular consensus is being created by Covid-19, its effects and how governments are responding.
Ensuring economies are virus-proof will soon be as uncontroversial as public investment in physical infrastructure already is.
But where is economics in all this?
Precisely nowhere, as an economist demonstrated when he recently said: “You can’t defeat Covid without hurting the economy.”
Most economists, and not just conventional ones, would agree.
But people are the economy and their capacity to interact constructively with each other is what makes it flourish. This is precisely what the Coronoavirus — and every past and future epidemic — undermines.
What hurts people — and Covid could kill them on an unprecedented scale — does matching economic damage. For that reason, economists should have been the first calling for decisive action to kill Covid. Instead, they’ve been among the last and their pernicious influence is why action by government and business in the UK has been so slow.
It would make you laugh if it wasn’t so sad.
But at least a lesson is being learned. Making an economy virus-proof is not only ethically right. It makes complete economic sense as well.