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Getting away with it: How Britain escapes from the Covid economic crisis

·5-min read
 (HM Treasury)
(HM Treasury)

Since the beginning of the pandemic, the economic narrative has run along widely agreed lines.

Economists disagreed about relatively small things – how bad unemployment would become, how awful the recession might be – but the wider consensus was this:

We have to spend our way out of Covid. There is no point being cheap about it. And there will be a reckoning later, a huge price to pay that we have no choice about.

We need to buy time. Buy vaccines. Buy lives. We’ll deal with the fallout later.

Since roughly Christmas, nearly all of the economic data has been, if not good, then at least much better than feared.

Sometimes it has been flat-out exuberant. Last week Bank of England economist Andy Haldane said the economy is going “gangbusters”.

Today’s jobs figures were the latest good news. The UK added nearly 200,000 jobs in May alone as the battered hospitality sector started a bounce back that could surely last all summer, especially if the football team can win a few games.

The unemployment rate fell from 4.8% to 4.7%. That is the sixth month of jobs growth, leaving many to conclude that an economic corner has been turned.

At the start of Covid the most gloomy forecasts had unemployment going as high as 10%, a fate that Britain now seems well able to avoid thanks to furlough.

While two million people are still furloughed, most seem likely to go back to their old job – or get a new one.

The narrative from City economists is shifting. The notes to clients now have a slight “we might get away with this!” feel.

You can, we are discovering, turn an entire economy off and back on again without major scarring. You can put millions of people on furlough to protect their jobs and hey presto, most of them will still be there later.

This is awkward for City economists and politicians. Both dislike the idea that it might be possible to spend lots of money without any particular penalties.

There must, just must, be a price to pay for the most significant government intervention any of us has ever seen.

So, the bogey man now is inflation. Which is, we read, in danger of romping away from us, forcing rises in interest rates that will make our now huge debts impossible to service. Which in turn will mean cuts in spending. Which in turn will lead to huge unemployment.

(Yes, they are a cheery lot.)

So far, neither inflation nor unemployment is an issue. But the assumption is that we can’t carry on doing the thing that just worked. We have to stop and get back to “normal” – underfunding everything.

It’s like we are afraid of the notion that the best solution might be the one that looks most expensive (even it turns out not to be).

This isn’t to say we should throw money away. Keynes’ idea that the government should pay people to dig holes in the ground and then fill them up was only supposed to apply in recessions anyway, and we aren’t in one.

Value for money is important. Good housekeeping too.

But the voting public may find it hard to understand, if it was possible to invent money and spaff it around in the midst of a crisis, why not the rest of the time too?

Rishi Sunak has acknowledged this problem, fretted that the Conservatives might struggle to be the party of small government ever again.

Conservatives worry what the country will do about its £2.3 trillion debt “pile”. (It’s always a pile, never an investment or an asset.)

Here is what we are going to do about it: nothing.

It will sit there, slowly being eroded over time by the inflation we have been told to see as an unmitigated evil.

The bigger worry is the deficit – how much we borrow each month. If we stop adding to the debt, eventually the ratio of debt to GDP will fall as the economy grows.

(It should hit 120% before long, too much, by common consent, though Japan’s figure is 250%, and it seems to be ok. After World War II, the UK’s debt to GDP ratio peaked at 270%, then fell smartly after that.)

The worry is that small rises in interest rates change the debt dynamics substantially.

Servicing the debt costs about £2 billion a month at the moment, it will be perhaps £3 billion a month by 2025.

Certainly, we don’t want to look like we are just going to run deficits in perpetuity, no matter what. America might be able to carry that off, we probably couldn’t.

Tomorrow, Wednesday morning, we get the latest inflation figures, with the expectation that it has risen from 1.5% to 1.8%. That’s still below the Bank of England’s 2% target, but heading seemingly inevitably past it.

When does the Bank put rates up to deal with the surge?

A note from Capital Economics the other day has what it calls a “big non-consensus call” that rates won’t rise until 2024. It is out of step with rivals, but since it is quite often right, why not.

Capital doesn’t think inflation will stick above 2% until late 2023, until then we can live with it if its bumps above 2% on occasion.

Paul Dales, the chief UK economist at the firm, says his best guest is that inflation will peak at 2.6% in November. A lot of that will be “reopening inflation” as pubs, restaurants and the rest raise prices.

If that is the worst of it, if the City economists are right about this one, then it means the worst we have to suffer in financial terms from an awful virus is manageable borrowing costs and a sharp dose of inflation. Truly, we will have got away it.

I reckon it’s on. How the politicians deal with the revelation that chucking money about works is mostly their problem.

But they signed up for it, and you didn’t.

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