Covid-19

Easing does it

Economic policy beyond the lockdown

Laura Gardiner
Laura Gardiner
Jack Leslie
Jack Leslie
Cara Pacitti
Cara Pacitti
James Smith
James Smith

Having weathered the first wave of the coronavirus economic storm, the task now facing the country is how to reopen, revive, and rebuild our economy while the virus remains with us. The Government needs to act as quickly, boldly, and creatively in the recovery phase of the outbreak as it did in the initial rescue phase. Delay or relying on traditional policy levers not tailored to the nature of this crisis risks a widespread failure of firms and a return to persistently high unemployment; either would lead to long-term scarring to our productive potential.

In this report we go further than other studies by providing a comprehensive blueprint for how economic policy can support a rapid, strong, and sustained recovery. Our analysis not only provides a quantitative estimate of the overall size of the fiscal rescue package, which has to be larger – at around £200 billion, or around 10 per cent of GDP – than that seen in previous recessions. It also shows that the exceptional sectoral concentration of the economic hit means that policy measures need to be more targeted if they are to be both effective and provide value for money. And policy needs to build in the flexibility to respond either to a faster-than-expected recovery if a vaccine or an effective treatment is discovered, or to the re-imposition of strict distancing restrictions if there is a national second wave of transmission.

Key findings

  • The hit to the economy is highly concentrated in sectors providing in-person services to households, with output in hospitality, arts, entertainment and recreation, transport and non-food retail – which collectively make up around a fifth of the economy – falling by around a third between January and April. This is unusual relative to previous recessions, which have been more broad-based.
  • There have been stark differences in the impact of the lockdown phase on families at different points in the income distribution. One-third of richer families have increased their savings in lockdown, while poorer families are more likely to have seen their balance sheet deteriorate: one-third of those in the second income quintile have drawn down savings.
  • Higher uncertainty and recent increases in corporate debt risk holding back businesses’ investment in jobs and physical capital.
  • This crisis could lead to a return to levels of unemployment not recorded since the 1990s, because the sectors most affected are labour intensive.

Recommendations

  • On the supply side, the Government should introduce a comprehensive programme to support the labour market, the key elements of which are: a slower withdrawal of the Job Retention Scheme for the hardest-hit sectors; its replacement with a new Job Protection Scheme that subsidises work taking place in the hardest-hit sectors in the pre-vaccine phase; and measures to support inflows into other parts of the economy, including temporary employer National Insurance cuts to incentivise hiring, increased spending on social care, and activation and training for the unemployed.
  • Also on the supply side, the Government should convert existing corporate lending schemes into Income-Contingent Loans by limiting the total amount that any firm is required to repay in a given year to 5 per cent of total turnover, allowing firms to write off 90 per cent of the cost of adapting businesses to returning to safe operation, and writing off any outstanding loan principal at maturity.
  • On the demand side, the Government should create a ‘High Street Voucher’ scheme to boost consumption in the hardest-hit sectors. This approach is more targeted and progressive than a VAT cut, and, unlike the flat-rate cash transfers employed in the US, could not simply be saved by higher-income households. We propose vouchers worth £500 per adult and £250 per child. The Government should further support consumption among lower-income families via boosts to Universal Credit’s child and couple elements.
  • Also on the demand side, the Government should increase investment spending, targeted at projects that would have high social value irrespective of the progress of the virus. These include investments aimed at advancing progress towards zero carbon, and improving social and transport infrastructure.
  • The Government should prepare for the risks of a second-wave lockdown by aiming for broader, and more equitable, coverage of the Job Retention Scheme, the Self-Employment Income Support Scheme and the social security system. This should include lower earnings replacement rates for higher earners on the first two, and further increases to the basic and couples elements in Universal Credit. In addition, policy makers will need to recognise the impact of the crisis to date on firms’ balance sheets, making a repeat of widespread liquidity support insufficient. Our proposals for delivering support via Income-Contingent Loans would help to overcome this challenge.

Further reading

Post-pandemic participation
Exploring labour force participation in the UK, from the Covid-19 pandemic to the decade ahead
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Louise Murphy, Greg Thwaites
Right Where You Left Me?
Analysis of the Covid-19 pandemic’s impact on local economies in the UK
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Mike Brewer, Jack Leslie, Lalitha Try
Leaving lockdown
Young people’s employment in 2021: improvements and challenges in the second year of the Covid-19 pandemic
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Louise Murphy
Laura Gardiner
Laura Gardiner
Jack Leslie
Jack Leslie
Cara Pacitti
Cara Pacitti Senior Economist
James Smith
James Smith Research Director