Friday 1 May 2020

Economics of Covid-19 – Let’s all avoid the ‘A word’

Boris Johnson is back from his personal battle against Covid-19 and yesterday chaired the daily Downing Street coronavirus press briefing for the first time since late March. One journalist asked if the cost of the pandemic to the public purse meant that the crisis will be followed by another lengthy period of fiscal austerity. The Prime Minister refused to utter the ‘A word’ preferring instead to look forward to the sunny uplands of an economic rebound. Many will see his response as a mix of political necessity and typical Johnsonian optimism. Either way, I think we should all avoid fretting about public borrowing and debt at present and focus instead on how to boost economic growth.

I was born in the 1950s at a time when the UK and many other major economies were burdened with massive post-war debt. Yet the first 20 years of my life were a time of growing prosperity, the ‘never had it so good’ generation. There was post-war debt but also a post -war boom, with very rapid rates of growth in national income driven by economic and social reconstruction. Public debt mattered but could be financed and so didn’t, to use contemporary parlance, ‘impose an intolerable burden’ on the post-war generation.

Unfortunately, for the past 40 years public discourse has been so dominated by small government thinking that balanced budgets are seen as a good thing in all circumstances on the assumption that state activity almost always crowds out private investment and enterprise. This is nonsense. It’s useful to be fiscally prudent in good times, reducing deficits and paying down debt, while the private sector does many things better than public bodies. But fiscal prudence doesn’t make sense if it actually results in reduced income generation, while excessive prudence (i.e. unwarranted austerity of the kind we saw for much of the past decade with the political aim of cutting public spending to the bone) is worse still.

I suspect that when the current crisis is finally behind us the UK government’s economic policy response will gain far greater plaudits than its health response. We should now ensure that economic policy continues on a sensible course as we gradually emerge into the post-crisis new normal. The focus must be on reconstruction and economic growth rather than short-term obsession with public borrowing and debt. Indeed, we will almost certainly need more fiscal stimulus, especially to boost investment, rather than less. The PM is right to avoid the ‘A word’ – we all should.