The many known unknowns amid the coronavirus crisis


By Jeffrey Matsu, CIPFA Chief Economist

As governments around the world respond to the social and economic fallout of coronavirus, it is still too soon to ascertain what the net fiscal impacts will be in the medium to long term. There is a palpable sense of urgency in ensuring that the lives and livelihoods of as many citizens as possible across society are protected, but this will invariably come with a future cost. While these considerations will be for another day, the after-effects of the pandemic will be far-reaching and anything but fair. Across industries, sectors, geographies and generations, redistribution will become a more challenging public policy imperative than at any time in recent memory.

Uncertainty begets uncertainty, so perhaps another great disruption was to be expected. As tumultuous as 2019 was in the UK, punctuated by political upheaval and all things Brexit-related, the economy appeared to have recovered from the 2008 financial crisis in a stable yet tepid condition. Never mind that economists could not fully understand why inflation remained stubbornly low or productivity recalcitrant to technology. The future, at least, appeared within our grasp. Monetary policy was set to normalise as a decade of fiscal austerity was declared over. A recession was not a near-term likelihood.

If anything, COVID-19 has startled an already beleaguered nation. After having just sold the narrative of an independent Britannia, the new leadership under Boris Johnson was caught out in yet another burst of the unknown. Rather than volte face, the UK has benefited from a decisive and well-coordinated policy response between the Exchequer and Bank of England that has brought together a combined £400 billion in support. Despite its impressive size, the magnitude and trajectory of the current public health crisis will likely require greater ammunition still. In the face of severe adversity, throwing caution to the wind is justified as it will minimize longer term damage from what is expected to be a short but deep recession.

While our current understanding of events is that anything is still possible, the risk is that the fallout will amplify pre-crisis imbalances. The just-about-managing (JAMs) are likely to be most exposed to those sectors affected by the mandatory shutdowns in retail, hospitality and leisure. Government-funded furloughs will be helpful insofar as these businesses stay afloat, which will be difficult where market demand has been lost rather than deferred. Meanwhile, trades and other blue collar occupations are least suited to working from home. Their reliance on public modes of transportation once initial restrictions are lifted will place them at the forefront of the next wave of infections and deaths. This says nothing of new entrants to the labour market who may face structural dislocations that can disadvantage their lifetime earning potential.

Issues of intergenerational fairness will become even more intractable. Interest rates at the zero lower bound may help those seeking to refinance a mortgage, but will be unwelcome to first-time buyers saving for a deposit. In contrast to incomes that have been depressed or lost altogether, wealth may recover more quickly benefiting older households. With 8 million families with dependent children affected by school closures across the UK, what will this mean for educational attainment – and those unable to engage with “virtual learning,” in particular? Mass telecommuting may serve as an ideal case study for more environmentally sustainable ways of doing business, but the climate change agenda will surely need to be postponed until a semblance of normality returns to our lives.

Perhaps the greatest risk would be complacency - making the a priori assumption that this will be a short and contained event, engendering a strong and fairly swift economic recovery. Market consensus suggests a V-shaped recovery based on historical evidence from previous natural disasters, but increased global trade and capital flow linkages may instead favour the contours of a U or W. Indeed, policy makers are faced with the task of ensuring that the economy does not tailspin into a full-blown depression while also looking ahead to someday unwinding the sizeable stimulus that could trigger rampant inflation and sustain even lower rates of productivity.

Maintaining the health of businesses and the wellbeing of their workers will be costly, and there invariably may come a time when the government will need to assess red lines. Once the crisis has passed, and social distancing and quarantine restrictions lifted, additional funding may be needed to support mental and social health issues as well. Higher taxes, the redistribution of resources and further cuts to already fragile local authority budgets are all possibilities. Promises are likely to be broken.

All the while, the dark cloud of Brexit looms.

This article first appeared in Public Finance.

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