As the FT has noted this morning:
Rishi Sunak has vowed to take “firm action to support families, businesses and the public services” in response to the spread of coronavirus when he presents his first Budget on March 11.
The Budget was supposed to showcase a new economic vision for Britain but as the country braces itself for the fallout from the outbreak, the newly appointed chancellor is having to rework the statement to convey a sense of “security”.
Rishi Sunak would be wise to consider all such measures. But he needs to do something much more than that. He needs to prepare for government deficits on the scale of 2008 to 2010, because the chance that they are going to happen is very high. There are three reasons for saying so.
First, the chance that we will avoid a quite significant recession as a result of coronavirus now look to be remote. Right now the issues are supply side: it is already apparent that some products originating in China are going to be in quite short supply for a while. This is only going to get worse. But then the demand side issues will kick in as people cut their spending. Fear alone always does this. Enforced inactivity will greatly exacerbate the trend. Government revenues will fall substantially as a result.
Second, what are called the automatic multipliers with regard to government spending will kick in. The NHS is going to need a great deal of money. So too will statutory sick pay budgets. And I hate to say it, but some employers will not make it through this crisis: unemployment will rise if this lasts more than a week or two, as looks likely now.
Third, the tax gap will increase enormously. Tax that is due will simply not be paid. Partly that will be with government consent. Partly it will be because there will be insolvencies. And since the tax gap is measured in cash terms, this will show as deficits, which the bad debt will be, as a matter of fact.
There was until recently talk of a Brexit cliff edge. That may still happen. But before then there may well be one induced by coronavirus instead. And the descent into government deficits might be very rapid indeed.
Let's be clear: no one would wish this to happen. My concern that it is likely again arises for three reasons.
The first is that the Tories have persuaded themselves that government finances can be controlled. They have had to believe this to blame Labour, quite inappropriately, for 2008. They are as a result wholly intellectually unprepared for what is to come.
Second, in that case I fear that a Tory led Treasury is ill suited to the task it faces, and may simply not react as appropriate.
And third, whilst there is a complete narrative that can suggest this will not be a crisis, in the form of modern monetary theory, the attacks upon it from right wing politicians and media who are all too prone to refer to the magic money tree, means that rolling this out as an explanation for policy may be harder than it should be.
We face hard times.
They will be made harder by a government ill-prepared for deficit management, which they deny can happen on their watch. That lack of preparedness might make hard times much harder than they need be.
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I note Italy are unleashing Corona QE https://www.ft.com/content/a6f59348-5bae-11ea-b0ab-339c2307bcd4 It’s going to be difficult for the govt to explain how other countries can do this and the 5th, 6th (whatever) richest country on the planet somehow can’t. People might start asking why we can’t do this for other things too, like schools and hospitals, social care, potholes etc. I see a considerable upside here.
Not quite QE – more a stimulus
They cannot do QE as they do not have their own currency
Use of the term ‘inject’ is perhaps inappropriate then? I did wonder…
No….it’s fiscal stimulus, but nit QE
Does anyone know if there is information about a Coronavirus season similar to flu? I ask only to wonder if cases will fall during summer months and return as the weather gets colder. There doesn’t seem to have been any discussion of this in the press or Broadcast media
No one knows as eyt….it is assumed it will be better in the summer as all respiratory diseases tend to have lower impact in summer months
If it’s anything to go by (probably not), Spanish ‘flu’ spread in 3 waves, with maximum deaths occurring during the winter of the 2nd wave in 1918, after people believed it had ‘died off’ during the summer months – https://en.wikipedia.org/wiki/Spanish_flu#/media/File:1918_spanish_flu_waves.gif.
Of course, medical knowledge and facilities were very different back then. And the horrendous insanitary conditions of WW1 trench warfare created the perfect environment for its devastating incubation and spread. In spite of its name it’s now generally believed that it, too, originated in China (https://nationalpost.com/news/canada/spanish-flu-the-pandemic-that-killed-50-million-started-in-china-but-may-have-spread-via-canada-historian-says)
This diagram, showing the corresponding movement of the Dow, may be of historical interest to some – https://static.seekingalpha.com/uploads/2018/8/14/saupload_SpanishFluAndDowJones.png
Thanks – soberly
I’ve heard commentary that we might expect incidence to fall in the northern hemisphere during our summer months. But there is a chance the opposite may be true during the southern hemisphere winter. If it rumbles on until next autumn, it could roar back.
And then there is the observation that this sort of disease can have a second peak after it seems it has passed the worst and the countermeasures are scaled back (for example, watch out when China allows more people to travel and back to work). And who knows what is really happening in Iran.
As you say, sobering.
Remember though that the government no longer bears the burden of Statutory Sick Pay:
https://www.gov.uk/employers-sick-pay/help-with-sick-pay
Though the amounts aren’t great, the costs combined with decreased productivity could definitely push some employers under.
I think this was another crafty change aimed at “reducing the deficit”. Talk about underhanded.