Covid-19: Economy

Lord Eatwell Excerpts

Thursday 4th June 2020 Lords Chamber

Moved by

[Lord Eatwell]

That the Virtual Proceedings do consider (1) the economic lessons learned from the COVID-19 pandemic, and (2) the measures necessary to repair the United Kingdom economy.

The Motion was considered in a Virtual Proceeding via video call.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, to repair the UK economy, we must learn the lessons of the past dreadful months. The new normal cannot be the same as the old normal. We are today enduring the second major economic crisis in 12 years. The global financial crisis of 2008-9 saw UK income fall by 5% in one year, and the government deficit rise by £110 billion. In due course unemployment rose to 8%. This year the Bank of England expects GDP to fall by 14% in one year and the government deficit to rise by £250 billion. Unemployment will soar to 10% or more as the furlough scheme winds down; that is about 3.5 million people unemployed.

In 2008-9, thanks in no small part to the efforts of my noble friend Lord Darling, the financial system was stabilised, the decline in GDP was arrested and by the first half of 2010 the UK economy was growing at an annual rate of a little under 3%. We won the war; but we lost the peace. The coalition Government’s austerity budget of June 2010 killed the recovery stone dead.

The past 10 years have been the worst decade for the economy since the war. Productivity stagnated, real household income barely grew at all, inequality rose inexorably, local government and social services were starved of resources, and persistent underinvestment meant that the NHS had to take on the pandemic in a seriously weakened state. Now we are fighting a battle against Covid-19. Talk of a trade-off between beating the virus and boosting economic recovery is seriously mistaken. Without an effective lockdown or an effective “test and trace” system, the economy will not recover. With ineffective measures and many new cases every day, most people will stay at home. The idea of cash-strapped workers being forced back to work in unhealthy conditions is abhorrent. You cannot restart the economy without having the virus under control.

How, then, do we assess the cost of this disaster? The cost is not the £250 billion increase in the budget deficit. That is the financial consequence of government policy; it is not the economic cost to the British people. The real cost of the shutdown is the loss in real GDP, right now and in the medium-term future. It is the loss of the output of goods and services resulting from people being forced to stay at home, retail and hospitality being forced to close, airlines and factories falling idle, the collapse of companies that are vital parts of the supply chain, and so on.

A fall in output of 14% means that, on average, the income of every man, woman and child will go down by 14%. That is a cut of more than £4,500 in the disposable income of the average family this year. We all know that the cut will not be spread evenly, on average. Unless something is done, even greater costs will be borne by those who, through no fault of their own, have lost their jobs or lost their businesses—everyone whose source of income has disappeared. In these circumstances spending by the Government to sustain demand, support employment and enable firms to survive is not a cost to society at all. If the increase in the national debt reduces the loss of real GDP, that is an economic and social gain. It is not a cost; it is a benefit.

Of course, the Government’s financial measures will not be costless if they in turn have a reverse effect that leads to a reduction in GDP. Given the increase in national debt, the “deficit hawks” will demand a new austerity to pay for it all. They should be ignored. The deficit will fall steadily as production levels are restored. The debt-to-GDP ratio will likewise fall over the years ahead. Further austerity will just add to the terrible cost of the pandemic. Of greater concern is the likelihood of negative feedback from the financial services industry, enforcing bankruptcy, especially on small and medium-sized firms, and further depressing output.

Our financial sector places the highest premium on liquidity—on the ability to get its money back easily. Banking logic will be to foreclose on non-performing loans, forcing viable companies out of business. The measures that have been put in place by the Government to protect industry are a temporary band-aid. The loan schemes are loading up company balance sheets with debt. It is estimated that around half of them will default, deepening the recession. There is no path to recovery that is paved with bankruptcies.

As and when the economy does begin to recover, the Government will be faced with significant fiscal management challenges. It will need to relearn forgotten skills in managing tax-and-spend to secure the largest possible output and the flow of resources to where they are needed most. Carefully sustained demand pressure is needed to provide a profitable platform for reconstruction and recovery, and to leave space for the Bank of England to concentrate on the maintenance of financial stability. We must abandon the pretence that minimal interest rates and quantitative easing stimulate output. Instead, they wreck pension schemes, push up house prices and stimulate the Stock Exchange.

What have we learned about our economy and society in the past four months? We have learned that our NHS is not funded in a sustainable manner so that it can protect us. We have learned that our social care system is neglected, fragmented and underfunded. We have learned that the unemployment and benefits system is unable to safeguard livelihoods when incomes collapse unexpectedly, particularly for those in the gig economy or the self-employed. We have learned that malignant inequality is manifest not only in income, housing, and opportunity, but in death from the virus. We have learned that our system of government and politics fails to produce the co-operation needed to prepare us for the next crisis.

We have also learned the damaging consequences of current economic policies. Governments have steadily removed the regulations and norms that provide protection when the lifeblood of our society is threatened, whether that lifeblood is biological, environmental or economic. In the pursuit of short-term efficiency, we have created a world more easily prone to shocks, but with fewer buffers to cushion those shocks. Pandemics are today not just biological; they are economic and environmental too. In sum, we have learned that our economy and our society are not resilient. Resilience will require a new form of political economy.

Every company manager worth their salt has a disaster recovery plan prepared for his or her firm, but only the state can protect us against the consequences of systemic disasters. We learned that in the 2008 financial crisis, and we are learning it all over again today. We must begin by building resilient social services —notably, but not exclusively, the NHS and social care. That includes restoring the local public health system that has been disabled by the 60% cuts to local authority budgets in the past decade. The Government’s emergency grants cannot re-magic that sort of capacity overnight. No wonder it is proving so difficult to implement an effective test and trace system. Resilient social services will require well-trained, well-paid essential workers. Can the Minister explain why, when Britain was hit by the virus, the NHS was short of 50,000 nurses?

Ensuring a resilient labour force will require short-term and medium-term action. A recent report from the London School of Economics reveals that what it calls the “Covid generation” was already suffering falling real wages, fewer opportunities, and stagnant or declining living standards. Now that the crisis has drastically worsened economic and education inequality, young people are even less likely to climb the income ladder and less likely to fulfil their potential, regardless of their background. Are the Government prepared to introduce a job guarantee scheme for those facing long-term unemployment and catch-up tutoring for disadvantaged youngsters? The Bank of England is the backstop for the financial sector. Will the Minister tell us what will now be the employment backstop for Britain’s youth?

Rebuilding our economy will require a resilient financial system, by which I mean not just stable financial markets but a financial system that does its proper job in funding and supporting industry—supporting the production of the goods and services on which our standard of living depends.

All noble Lords will be painfully aware that the Government’s management of the pandemic compares very poorly with that of Germany. In Germany there have been around 7,500 deaths; in Britain there have been 50,000-plus. The economic comparisons are also disheartening. Similar amounts of government funds were provided in Britain and Germany to support small and medium-sized firms. In Germany the funds flowed readily; in Britain they did not. The reason was the superior German pipeline. The banking system there is accustomed to investing in industry, aided by public institutions. In the UK, the banking system proved once again that it is not up to the job.

What will the Government do to ensure that small and medium-sized industry can invest and grow, confident in the availability of the sustained, resilient financial support it needs? Does the Minister agree that what is needed at all levels of industry is not more debt but more equity? What principles would guide the Government to provide the equity support that British industry, large and small, desperately needs?

Of course, Britain is not alone in facing new economic challenges; the global health emergency is also a global economic emergency. Achieving a resilient Britain demands a resilient international trading system, but world trade is forecast to contract by 34% this year. The pandemic has exposed severe weaknesses in global production and trade, just as the crisis of 2008 exposed severe weaknesses in global financial markets. Countries are turning in on themselves. Facing a hostile United States, the WTO is falling apart, with its director-general resigning a year ahead of time. After the 2008 crisis, a massive international effort, led by Gordon Brown, put in place a regulatory system capable of stabilising international financial markets. How do the Government plan to rebuild Britain’s trading relationships in a more resilient manner?

Finally, we all must recognise that a resilient economy must be a sustainable economy. Just as the pandemic, serious though it is, is but a warning of other potential biological disasters to come, the floods of winter, the heatwaves of summer, the melting of the ice caps and the fires in Australia are but the warnings of environmental disasters to come. We are woefully unprepared. The pandemic is an alarm call—a warning that we must build a more resilient economy. That will not be easy to do or to sustain. Resilience will cost money, and the pressures of competitive markets and short-run economic efficiency will erode our commitment to prepare for the shocks that will occur, at some unknown date in the future.

We must forge a durable public and political consensus behind resilience, otherwise short-term economic priorities and electoral cycles will soon get in the way. As the emergency fades in the memory, the stocks of PPE will again be slowly whittled down, the NHS squeezed again, social care returned to being a national disgrace, local public health officials starved of resource and experts ignored, and inequality will be on the rise. This must not happen again. We must win the war, and this time we must win the peace.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am grateful to all noble Lords who have contributed to this debate. There were so many interesting, albeit short, interventions. I have one major comment, but first, I express concern at the Minister’s use, three times, of the phrase “sustainable public finances”. That sounds very comfortable, but it is the weasel word for austerity. Whenever anyone hears that phrase, the alarm bells should ring.

My general comment is that what many noble Lords looked for was vision—a vision of a resilient economy. In the public sector, that is easy to define. It means building up what the noble Viscount, Lord Chandos, called “redundancies”, meaning the excess capacity to respond to emergencies such as the one that we are suffering at the moment. However, in the private sector, it means a regulatory framework which ensures that private firms sustain the level of capacity which will enable them to respond effectively to major crises. In the financial sector, stress tests are required, and those stress tests test redundancies; they test the capacity to respond to major shocks. We need a wider view of resilience and redundancy—in that specific use of the word—to ensure that in our economic future, we can deal with the major biological, environmental and occasionally economic shocks that will inevitably come.

I thank the Minister for his summing up and look forward to hearing his response to my questions. Thank you.

Motion agreed.