Here is how we can recover from coronavirus without resorting to economic austerity
My wife calls the remarkable event we are experiencing right now “the Corona Correction”. Throughout history there have been points in time when a correction has occurred. Often, in modern history, this has been by war but in previous times and occasionally since, it has been by pestilence as with the Spanish Flu episode.
Sometimes they go together. These times are a great leveller. No body is exempt from the risk of war or pestilence and both have a capacity to destroy wealth. The wealthiest in Japan lost 98 per cent of their wealth by the end of the war. Without corrections, things become skewed and social pressure builds. But as with life itself, it is what we do with it when it comes that counts.
I wrote before coronavirus took hold that we were entering a post-crash, post-Brexit phase of history, analogous to the 1930s, during which economic stimulus would be the order of the day. I now believe that the “Corona Correction” will catapult us into the equivalent of the post-war 1940s.
Of course historic parallels never quite work as circumstances are always different, but they serve as a symbol of the times in which we live. Hopefully, coronavirus a has distinct differences from a world war. It will not have left the world with the physical destruction of war. It will not be as prolonged and with action and good fortune, it will not produce the casualties. However, “it will be over by Christmas” is a hackneyed phrase and has too often been found to be untrue in war and in pandemics. Past episodes have had more deadly second peaks and third peaks beyond that. The ability to avoid a very prolonged saga and thus a great impact on the economy, very much depends on the establishment of herd immunity and on testing for this so that things can return to normal. It also requires politicians to take hard decisions.
All of this is very important for the nation’s long term economic health and wealth. There is no telling where a pandemic may lead in the context of a global depression. Normally it is war and then pestilence, but the reverse could also be true as the strains of disruption develop.
Barring a global depression, how the UK handles the recovery and economic health will determine Britain’s place in the world for a generation, not least in the context of Brexit. We must avoid going from more than full employment to mass unemployment, from the best growth amongst the key EU economies to lacklustre.
It is vital that the government be working on the economic recovery phase just as it is bending every sinew to fight coronavirus. A post Brexit UK needs to emerge from this economically strong ,which will require some brave decisions on the part of government. We must ensure that the medicine is not worse than the disease, while people’s attention is now primarily on health and survival, it will very soon turn to jobs and wealth (or poverty).
The parallels with the 1940s exist. We will be surrounded by a world and in particular a Europe, ravaged with debt and unemployment. It remains to be seen who will pay for a “Marshall plan” for coronavirus, certainly not this time the USA, both because of politics but also because the USA itself will have suffered direct loss. Will Germany and its northern cohort be the paymasters? Can they afford Italy and Spain? Will China use the opportunity to acquire assets at bargain basement prices under the veil of aid? Britain cannot fall into that trap and will need to quickly adapt its competition and takeover rules.
The work in this crisis of our fantastically innovative engineering sector has demonstrated the existence and importance of manufacturing. One of the outcomes of this correction may be an increase in “re-shoring“ and a boost in manufacturing, essential for the regeneration of the regions. The Corona Correction has further driven sterling to a competitive rate, and this itself will help the rejuvenation.
It was not long ago that government and the city were arguing that UK Pharma was not a strategic industry, just as they said food production was not essential, instead we could allow production to become “green” space. Just as in the 1940’s, it will important in the recovery to create the economic backcloth for production and recognise its importance.
While I will always be disposed to free markets, these can only be truly free within the context of the domestic economy, internationally there are many distortions, plus cheating occurs, even close to home, take for example the German KFW state-backed business bank, free of state aid. Free markets are desirable, free trade is an objective, but lets not be blinded by philosophy. The national interest is paramount.
Speaking of which, EU-imposed state aid rules should be ditched, irrespective of the Withdrawal Agreement and the Northern Ireland trap therein. Of course WTO frameworks should be respected. The British Business investment Bank should be expanded and be more bold, working with angel investors and the city to create mezzanine finance options for gazelle businesses and family-owned and/or run enterprises.
The economic recovery from coronavirus is critical and it is vital it be as soon as possible. It is clear that just as in the forties, government will have an important role in the economy. But rather than making the mistake of central command and control, they should this time nudge and create the environment for enterprise so that the winners pick themselves. Provide finance for those who need it. Nurture home grown companies. Sustain strategic industries. Leverage the power of the City. But resist nationalisation, resist the controlling tendencies of Whitehall.
It is also clear that services, particularly the flexibility of on-line activity, will prove to be a bedrock and strength of our economy and will recover relatively quickly. A continuing tech revolution is a must.
Unlike the Forties, we this time have the possibility of lines of credit at very low interest rates. The country is not bankrupt. Our economy remains balanced, for now. We do not need to bow to a foreign power, as we did to the USA, by choosing to take government to government bail outs. We are in a very good position to stimulate growth. But this only works if the business sector emerges intact and ready to fire up. Unlike post-war Britain, building houses and a new NHS are not the priority. While Keynes famously said that digging holes and filling them in again is economic activity, we must instead invest carefully in those things that improve productivity and growth. Perhaps HS2 will finally be put to rest by the Correction.
The Treasury and the Bank of England (BoE) have already poured billions into the economy: loans, grants, income support and QE but seemed to have learned nothing from the financial crisis. The route to success is not in the investment, but in how it is made. Many businesses are already liquidating. Within weeks, many more will disappear, often never to return.
Just as in 2008, the BoE have guaranteed bank loans to business. Just as then, the banks are also requiring personal guarantees from business owners- double indemnity. Many will rightly close up shop faced with possible ruin and the bureaucracy of the system. It’s all about the banks, and not at all about the bulk of the economy.
When it comes to employee support, furloughing, good as it is, effectively pays businesses to lay people off. If we want to maintain an intact economy we need to pay to keep people on and working. In so many ways this crisis is demonstrating that Whitehall does not understand business or how the economy works in practice, nor do its representatives like the CBI, it appears.
Most importantly, in recovery, the government should not be tempted to return to austerity. Every age has its remedy and in a world in which deflation is lurking, in which there are record amounts of money chasing opportunities to invest at low interest rates the UK must aim to stimulate growth. We must free ourselves of the shackles of the transition period as soon as possible and in a post-coronavirus world aim for maximum growth, concentrating first on the domestic economy and then on global trade. If we are able to achieve this, tax receipts will rise without the need to increase tax rates. In fact borrowing, investment and tax cuts should go hand in hand. Debt will shrink as a percentage of GDP and will be paid down. Importantly, this must be private sector-led, with a private sector stimulus.
Finally, as in the 1940s, I suspect that the NHS will emerge as a strategic asset into which there will be more investment. However, despite the very many talented and dedicated people who work in it, it is already demonstrably the case that a centralised command and control approach, with a streak of the Whitehall ”not invented heat syndrome” will have to change.
As one who did nearly two years as an executive in a large London trust, with the express remit of finding ways to make the NHS more efficient and cost effective and also as an non executice director elsewhere, I can testify that it works because of the dedication of its people - not its stultifying bureaucracy or its management determination to resist change. Despite that, for many it is the nearest thing to religion.
The Health Secretary writing off over £13 billion of debt highlights both the opportunity for a reset but also the challenge of servicing the debt and the absolute need to focus on a booming economy to pay for it.
Just as in the Forties, the NHS was invented and funded, in the post-coronavirus world it will need to be invested and re-invented.
John Longworth is chairman of the Independent Business Network, chairman of the Foundation for Independence. He was formerly Director General of the British Chambers of Commerce and a Conservative MEP.