The Economic Recovery and the Coronavirus
Before most of us had heard of the Coronavirus, the UK economy was in a difficult situation. In the three months to February 2020, the economy grew by 0.1%. This was an improvement on the zero growth over the preceding three months. UK productivity continued to see a severe problem with productivity. Wages finally reached pre-2008 levels in February. At the turn of the year, Bloomberg put the odds of a US recession at 27.5%.
Added into this mix was Brexit. The UK government’s Panglossian position of seeking a comprehensive trade deal negotiated in a few short months already seemed unrealistic in January. It is even less realistic now. The need to ‘get Brexit done’ seems to trump the need to ensure a stable economy for the next decade. We have now lost four years and counting to the obsession over Brexit. UK households have already lost an estimated £700 a year. To pretend that this will be fixed by ‘finishing’ Brexit with rushed trade agreement is foolish.
It is into this mix that the Coronavirus Pandemic arose. During it, I have had two worries. Firstly, I worry that we become fixated on the scariest threat; that in a time of several crises we address the one that appears most frightening at the time and forget about all else. My second worry was that the response to the Coronavirus would be a knee-jerk tax-and-spend one; squeezing working-age incomes and cutting the services that pulled this country through the pandemic. It is important that both pitfalls are avoided.
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This is why news of Rishi Sunak’s planned budgetary measures is cause for concern. The good news is a planned reduction of VAT. Cutting VAT makes sense in this context because it reduces the costs of economic activity, something we need to promote at this time. Similarly, as regressive tax, its reduction is also welcome from a social justice standpoint. For this reason, I find it strange that VAT has managed to remain at 20% over the past decade, particularly as governments have sought to incentivise economic activity and complained about the now-forgotten Just-About-Managings (JAMs). 20% remains the highest VAT has been, higher than the 17.5% it was over most of my lifetime and the 10% it was at when introduced in 1973.
Yet, cutting VAT seems to be a diversion from wider problems in the budget. The FT reports that such a cut in VAT would likely come with deferred tax rises and lower public spending, as the UK comes to terms with a debt-to-GDP ratio of over 100%.
While some degree of budgetary restraint is necessary, I have two particular worries about this present thinking on the tax and spending side. On the side of taxes, my primary worry is that rises in income tax or taxes felt by the working-age population will further squeeze wages and economic activity. This would act to further limit economic activity, not incentivise it.
On the spending side, the Coronavirus Pandemic has highlighted why a resilient public sector was needed. Cutting spending on public services would not only harm our ability to adjust to current and potential future challenges for our country. The government will be well aware that to follow their encouraged rounds of applause with cuts to wages, resources, and conditions would be seen as a betrayal.
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In the short term, further sustained support should be given to businesses, universities, and cultural institutions. Had the Coronavirus Pandemic not hit, many of these businesses and institutions would have been financially viable. This is, therefore, a question of opportunity cost; the effects that not helping these institutions financially will have on communities and on the economy as a whole. Once gone, universities, theatres, and businesses will be neither easily nor cheaply replaced. Protecting them from an act of God seems a no-brainer to me.
Beyond this scariest threat, the key questions surround how to make the UK economy sustainable in the longer term.
The first and most obvious problem here is that of Brexit. The next stage in leaving the EU are where the real costs of trade barriers are borne, as tariffs and non-tariff barriers come into effect. Britain will be less competitive with its major trading partner, further weakening the country’s bargaining position with other countries as reaching these agreements become increasingly critical for our economy. As the ultimate deadline of the Brexit process approaches, the realities of the fantasising will become increasingly real.
One depressing element of this is that I do not think many of the underlying questions of Brexit will be resolved, either in the Conservative Party or nationally. Global institutions and legal obligations will still be there. Trade and its required trade-offs will remain. Threatened local businesses will still lobby their MPs seeking one-off rules. Given the existing arguments within the cabinet between protectionists and free-traders, I do not expect Brexit to solve these problems. The problem will simply embody itself in the divide between neoliberals and nationalists in the Conservative Party. In fact, I expect the coming debates about exceptions to free trade to exacerbate these divides.
Secondly, I believe that current and future debates over taxation should surround questions of its reform rather than adjustment. There are fundamental questions about the distribution of wealth in our economy. Wealth is not simply distributed through taxation and state hand-outs but also through the beneficiaries of the incentives created by government policy within the wider economy. David Willetts’ excellent presentation on the generational effects of current policies is a perfect example of this. Housing policy is one element encouraging a redistribution of wealth towards older and wealthier homeowners. Raising income taxes at this time threatens only to further squeeze working-age incomes without addressing wider sources of income and wealth in the economy.
One of the key reasons I have recently become such an advocate of Henry George is because of the relevance of his arguments to the current economy. George raises an abstract point about whether it is preferable to tax productive or unproductive activities in our economy. Income taxes are taxes on the economically productive. Taxes on rents are taxes on income from unproductive activities: Nothing is created by the landlord. Questions need to be asked about what kinds of activity we should tax, who in our society is able to bear the burden of the current crisis, and how we can better incentivise and facilitate greater productivity and economic activity. The Mirrlees Review is an excellent place to start when considering these questions.
The realities of the present situtation give me good reason to be pessimistic. The language surrounding the economy and Coronavirus is focused on tax and spend solving the national debt, not reforming our economy. The over-optimism, even obfuscation, surrounding the truth of a post-Brexit trade deal and its economic effects similarly worry me. It increasingly feels like we now face a choice between the needs of our economy and the needs of the fantasies of 2016. It is time to change course.
