The black swan event of the coronavirus has had unprecedented impacts on not only society, but has sent shockwaves through the UK’s economy. The extremities can be illustrated through a economic shock the world has not seen since the great depression in the 1930s. The government policies leading to quarantine restrictions and a shutdown of society have resulted in the economic growth of the UK economy slowing overall, and contracting by over 11%. To make matters worse the mass borrowing to protect society from this crippling pandemic has reached an alarming £349 billion this year.
The large budget deficit that has amassed to fund public spending in this crisis has a major opportunity cost for future generations. This is as they will need to adopt austerity measures in order to repay this debt. On top of this consumer welfare has been prioritised instead of capital expenditure (this being cut by £3.3 billion) prohibiting large future growth in productive potential. It is estimated that by 2025 the economy will still be 3% smaller than it was this march. It is arguable that schemes such as furlough which has just been extended, causes more harm than good due to deepening the deficits scars. This thus prevents future economic growth that would result in falling unemployment. On top of this future measures such as ‘pay rise’ in the public sector will be halted, to fund other measures such as schools. This has large negative externalities such as a falling incentive for rational workers who want to maximise wages going into working in the public sector. This may result in less public sector workers and thus this reallocation of scarce money may cause more harm than good.
However other programs being put in place whilst having large opportunity costs may be what the economy needs to stimulate growth. A clear example is the 3 year restart program that was announced. This is a much better usage of the scarce £3 billion it will cost than the alternative of providing benefits. This is as it will help to lower unemployment levels that are set to rise to up to 7.5%. On top of this it will help to stimulate aggregate demand and consumer confidence due to their being a wider availability of jobs. This will thus help buisness growth to kick start and this large pool of workers will encourage investment from overseas. This all in turn will have a multiplier effect on the economy for example increasing taxes and result in an increase in real GDP and reduction in the UK deficit which is sorely needed.
Altogether what I think is needed is not what is being enforced. I think the most important technique the government needs to use is higher progressive taxation policies. This is vital as it will help to redistribute wealth and stimulate aggregate demand. This is as it will mean the lower class with a higher marginal propensity to consume will have an increase in finance which is more likely to get spent. This will thus result in companies investing more due to increased ‘animal spirits’ as they know demand for products will increase in the future and they thus can increase profits maximising utility. On top of this the increased taxation can help fund repayment of the deficit helping the UK to experience a more ‘V’ shaped economy. However this will not happen due to the Tori manifesto stating that there would be no rise in taxes after the last election. On top of this the government needs to focus more on other events going on, most importantly Brexit. This will allow a smoother recovery as trade worldwide can continue at a rapid pace. If measures are not taken to ensure a swift leave of the EU, this may just be the beginning of a long recession for the UK.
