The Government’s response to the Covid-19 crisis has led to claims that the economic rule-book is being rewritten; that a Conservative Government has essentially rewritten the rules that have governed economic policy-making since 1979. The magic money tree has been found. There are even some courageous souls claiming that Sunak’s announcements of wage guarantees and support for the self-employed are endorsement of Jeremy Corbyn’s manifesto at the 2019 general election.
But while the scale of the Government’s response remains beyond dispute, how radical and innovative is it in reality?
To understand Sunak’s approach it is worth looking back to 2008. Government’s response to the liquidity crisis caused by the collapse of financial institutions was to recapitalise the banks, followed by massive quantitative easing; with, from 2010, a period of cuts to public expenditure which aimed – unsuccessfully – to reduce borrowing. The response was focussed on preserving the banking system. While politicians made noises about banking reform, little really changed – to the point where private borrowing, seen as a fundamental cause of the 2008 crash, has been allowed to surge back to 2008 levels. Long before Covid-19 appeared economists were warning of the danger of another credit bubble bursting.
Forward to 2020, and Government has announced packages of support for business and workers affected by Covid-19, including a £330bn package of loans for business; a commitment to pay 80% of the wages of workers who would other wise have been laid off for three months – worth in total around £80bn; and taxable grants to the self-employed based on their profits, with a total cost of around £3bn per month. The Government’s headline is “whatever it takes”; there is no doubt about the scale of these measures, but do they represent an economic sea-change?
It’s impossible to be precise about the overall costs because obviously nobody can be really clear about how long the measures will last. But one obvious feature is that the biggest element of that support – the £330bn business support package – is essentially an injection of liquidity into the banking system, with the loans administered through that system. Other support – apart from those aimed at the self-employed – is to be paid through employers. The UK appears conspicuously to be avoiding direct transfers of cash into people’s pockets, despite the growing calls for what is being described – wrongly – as a system of Universal Basic Income to get people through this crisis (it’s actually a one-off transfer payment which does not entail the fundamental changes to the tax and benefits system at the heart of basic income). It is relying on, and in that sense providing support for, the existing financial system.
In other words, the Chancellor’s measures do not look radical at all. At a time when people are arguing that the rules are being rewritten, Rishi Sunak appears to be delivering a strong message that they won’t be. There are striking institutional parallels between the response to Covid-19 and the response to the 2008 crash. There are obviously huge challenges to come – especially after the epidemic peaks and and how Government addresses the enormous risks around what could be a prolonged recession with a slow and fragile recovery. But at the moment, amidst all the talk about economic radicalism, Sunak’s approach looks very much like business as usual. The radicalism must come from elsewhere.