Over the last few weeks, the government has announced spending commitments worth tens of billions of pounds in order to counteract the negative ramifications of the Coronavirus lockdown. In response, outgoing Labour leader Jeremy Corbyn said that this proves he was right to advocate higher levels of public spending in the 2019 general election. This follows a general line of argument on social media that neo-liberal ideology has been undermined by the crisis.
This analysis is wide of the mark for a number of reasons. Firstly, ideology does not matter in a time of national emergency. The government has been just as willing to adopt libertarian policies in response to the crisis as statist ones. They have cut taxes for struggling businesses, reduced tariffs on imports of medical equipment, and lifted restrictions on working hours for essential staff and licenses for businesses to take deliveries. Secondly, supporters of deficit reduction have long argued that it puts us in a stronger position to deal with exactly this sort of crisis. As George Osborne used to say, we have to ‘fix the roof while the sun is shining.’
It is thanks to the difficult decisions of the last decade, which brought the current budget back into balance, that the government has been able to provide one of the most generous relief packages of any major, advanced economy. They have covered 80% of the wages of furloughed workers and the self-employed, provided a £1,000 boost to Universal Credit allowances, abolished business rates for the retail, leisure and hospitality sectors, and delivered grants of up to £25,000 for small businesses.
The US government has taken similar measures, but their underlying $1 trillion deficit means the Coronavirus lockdown risks plunging America into a full-blown fiscal crisis. Because the United States failed to enact similar entitlement reforms to get their structural deficit under control, they are in a weak position to weather an economic downturn. Whereas in the UK, with our debt-to-GDP ratio falling prior to the epidemic, we can take the estimated £200 billion hit to the public finances and still keep our national debt at sustainable levels.
The full economic impact of the Coronavirus lockdown remains to be seen, but it will certainly be costly – with nearly a million people signing on to Universal Credit in just the last two weeks. By encouraging firms to furlough workers through the Job Retention Scheme instead of laying them off, the government will have made it easier for the economy to recover as the restrictions are lifted. However, we do not know how long it will take for unemployment to come back down and the financial hit this year will leave us paying higher debt interest bills for years to come.
This leaves the government in a difficult position. Big cuts to public spending are not politically feasible, but at the same time the tax burden is set to rise to its highest level in decades. The Chancellor has already indicated that taxes will rise for the self-employed after they were given the same earnings protection as those on PAYE. This makes sense from an equity point of view, but the overall burden of taxation will have to fall to support family incomes and help businesses to grow in the wake of this crisis. There need to be incentives for businesses to invest with enhanced capital allowances and cuts to taxes that are holding back growth, such as Stamp Duty.
The government should still go ahead with the big increases in infrastructure investment announced at Budget 2020, but they ought to scale back their ambitions on day-to-day spending. The Comprehensive Spending Review later this year will be an opportunity to ensure that every pound of taxpayers’ money is spent wisely by rooting out waste in departments and addressing the government’s long-term liabilities.
The government need to get back to their fiscal rules as soon as possible and bring the current budget into balance. The Coronavirus pandemic has shown that economic crises are never too far around the corner and it is necessary for the public finances to be in a strong enough position to respond to any eventuality. By taking the difficult decisions to reduce our structural deficit and get debt falling, the government ensured that it was in a strong position to deal with this crisis and provide the financial support that workers and businesses need.
The temporary nature of this crisis means it will not necessitate another period of austerity. After a decade of spending cuts, the public were understandably getting weary. However, the government must show restraint on current spending whilst investing in growth-enhancing infrastructure to get the economy back on track. Far from vindicating the advocates of greater public spending, the Coronavirus has brought into sharp focus the importance of sensible fiscal management.
Ryan Hoey is a Politics Student at Queen’s University Belfast. He campaigned for Leave in the EU referendum, and stood as a candidate for the Conservative and Unionist Party in the 2018 Local Elections in England.