The coronavirus has apparently triggered an outbreak of surreal dreams. But none as surreal as the economic scenario released yesterday by the Office for Budget Responsibility (OBR).
According to the OBR, whose projections shape Treasury decisions on borrowing and spending, the UK will experience a sharp slump in output – with some 35 per cent of GDP lost in the second quarter – but then bounce back. Growth for the whole of 2020 is forecast to fall by -12.8 per cent before rising by a spectacular 17.9 per cent in 2021.
After that, the UK economy reverts to its formerly predicted sluggish growth until 2024. Government debt – currently 79 per cent of GDP – reaches 95 per cent but, again, because the economy emerges undamaged, it stabilises. The OBR is keen to stress that this is a “scenario”, not a prediction. If so it looks to me, and to many economists, a wholly unrealistic one. It is comparable to assuming that, if you drop a stone into a still pond, you produce only a single ripple.
All major international agencies are predicting not just a sharp drop and a bounceback, but serious long-term damage. The World Trade Organisation last week predicted global trade, which had already slowed sharply in 2019 due to the US-China trade war, could collapse by 31 per cent this year. With travel bans strangling the global trade in services, where there are no stockpiles to be drawn down and sold in a crisis, that could permanently damage the international service sector.
The IMF, which also published new figures yesterday, anticipates a worldwide economic contraction of -3 per cent this year – which means a slump on the scale of 1929 – but it is much more cautious about the recovery. That is because this economic crisis is bigger than 2008, there is “severe uncertainty” about its duration, and because there are so many more opportunities for politicians to screw things up.
“Much worse growth outcomes are possible and maybe even likely,” says the IMF’s economic counsellor Gita Gopath. “This would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment.”
Remove the euphemisms, and what the IMF is worried about is a sudden collapse in liquidity – ie access to ready cash; the destruction of otherwise healthy companies; and the bankruptcy of households who have been gorging themselves on cheap credit for more than a decade.
And that’s why the OBR’s surreal “scenario” is dangerous. Unlike an independent forecaster, the OBR effectively gives the British government permission to take certain actions, and at times can essentially mandate them. Those of us who covered George Osborne’s first three crisis budgets can never forget: it was the OBR’s failure to understand the destructive impact of austerity that allowed the Conservative-Lib Dem coalition to repeatedly double-down on the project. Growth would recover strongly, they said, even as Osborne slashed back public investment by 15 per cent in a single year, because business investment would soon achieve double-digit growth. Instead, growth flatlined, until the government was forced to change track.
This time around, despite both the Treasury and the Bank of England taking fast and unorthodox measures to limit the damage, complacency is a major danger. First, the “scarring” effects the IMF worries about are happening right before our eyes. The small business loan scheme, known as CBILS, is proving useless. Because Rishi Sunak has only guaranteed 80 per cent of the loans, leaving high street banks to pick up 20 per cent if the money is not repaid, those banks are not acting as an effective conduit for the money. Many businesses say they can’t even find someone at the bank to speak to, and as a result, just 1.4 per cent of those who have applied so far have been successful.
Second, because the financial and trade after-effects are unpredictable. Third, because we just don’t know whether the virus can be suppressed and defeated in a single phase, or whether the developed world has to face year-on-year travel restrictions, temporary lockdowns, highly stressed health and care systems, and major behavioural change.
The political danger underlying this situation goes deeper than complacency. It lies in the mismatch between the ideology in the heads of people like Rishi Sunak, Matt Hancock and Boris Johnson, and the tasks mandated by reality. Sunak has designed the fiscal stimulus to look big, but trickle into the real economy too slowly. The loans element of the stimulus is ten times the size of the direct and upfront injection of spending – and that’s designed to minimise the amount of deficit and debt loaded onto the government’s books.
Likewise, all the UK government’s direct interventions into the economy are either weak or ineffective. The fiasco over procuring adequate ventilators and protective equipment is the result of a government that doesn’t want, or doesn’t even know how, to coordinate the efforts of the private sector. The quasi-nationalisation of train operators and the quiet bailouts of airlines look fine for now, but these business models are in the medium term doomed if the UK endures several waves of infection.
As to the projected government debt, voices are already being raised within the establishment for austerity to follow immediately if we defeat the virus. The Social Market Foundation has called for the “triple lock” that protects state pension payments to be scrapped as an act of “intergenerational solidarity” in Austerity 2.0.
Let’s be absolutely clear: the lessons of the 1930s, repeated in the UK and Europe during the 2010s, is that austerity is the medicine that kills the patient. It has not just destroyed local government services and eroded the resilience of the NHS; it fuelled the resentment that drove people to vote in millions for the xenophobic and racist Ukip. In Europe it has driven the entrance of far-right parties into government coalitions.
If free-market ideology demands yet another decade of austerity, it will kill democracy in some countries. It will certainly kill the eurozone; and it will destroy Johnson’s hard Brexit strategy. The ideologues of the right know that the developed world cannot escape from this trap – of high debts and a scarred economy – without dramatic state intervention, higher taxation, borrowing on a wartime scale and a significant redistribution of wealth.
That’s why it’s the right who are so insistently calling for the lockdown to be lifted early, and who promoted the “herd immunity” strategy that would have killed 250,000 Brits instead of tens of thousands.
For the left, the case against austerity has to be made now, and loudly. Though tax rises will be needed – both on the wealth and the incomes of the rich – there is no chance they can be raised by the amount required to “pay down the debt”. We are going to have to borrow, and the Bank of England is going to have to print money, and learn to live with it.
The real problem is that, with the national debt above 100 per cent of GDP for the foreseeable future, the right will try to abandon the commitment to decarbonise the economy by 2050. Social democracy in a post-coronavirus world will consist of strategies to drive growth and productivity alongside a commitment to borrow and invest, and to combat climate change and inequality. The surrealism of the current official predictions masks a profound fear among the elite that, faced with an era of pandemics, only the left has answers.
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