The impact of Austerity Policies and Covid-19 on countries World-Wide (Part 3)
By Rocio Ferro-Adams
Some ideas from 28 February 2021
Introduction
Austerity as a reaction to the 2008 Financial Crisis, was supported and actively promoted by large institutions such as the International Monetary Fund (IMF) and World Bank and European Central Bank (ECB). These institutions proceeded to roll out natural varieties of austerity policies and packages across much of Europe and the US, and across developing countries in previous decades. Attempts were made to describe and define what austerity actually meant, by economists and policy advisers during the last decade, despite recognisable traits of restraint in fiscal economic policy, in the decades before. Restraint on Government spending was not a new idea and had been refashioned into various policy programmes around the world. In fact, historical analysis show, early economic systems to be shaped by early ideas about economic growth bases on little state intervention and spending, which encouraged market competition. This was a recognisably unfair system, driven by market principles, which left many people behind; widening the gap between the very wealthy and the very poor (economically inactive).
Economists ‘leading the way’
Sue Konzelmann (et al) produced an account of modern contemporary Austerity in 2014, identifying it largely as a reaction to the sub-prime mortgage debacle in the USA, where poor quality debt had been sold and repackaged and rebranded in global financial markets, as high yielding products at low risk.[1] When the debts went ‘bad’, the repercussions were felt as ripples throughout the banking systems. The story she argues was rewritten so that these behaviours, which resulted in poor standards of debt handling and banking, were described as a public sovereign debt crisis, and were then blamed on profligate government spending. Countries identified as at risk were those described as ‘peripheral European countries who borrowed too much, but these countries were not indebt before the crisis, with the exception of Greece which has hidden its’ financial difficulties since before joining the European Union (EU) in 1981. The private debt crisis then became a public debt crisis.
One very important point that her writing raises, is that austerity as a concept evolved. It wasn’t simply something which arose out of the 2007-08 financial crisis. The concepts behind rolling back of state provision and reducing the public purse, to manage the economy are not new concepts, but are described over three hundred years ago.[2] They also combine ethics and ideas about public and private spending and one key concept is that public spending is capable of squeezing out private expenditure, which is damaging to the economy based on free markets and their growth.[3] Greece is often used as a model to illustrate the problem of how public debt of up to 90% of GDP can result in economic stagnation, the impact of which was significant and required immediate Government spending cuts.[4] Prospects of defaulting on loans were high and the ECB also ensured that the debt crisis was passed to the Greek state, rather than the world-wide financial sector. The impact of which is expressed in the macro-economic world and real-life government spending. The financial costs of debt and its consequences were pushed on to real people, onto incomes and households. Incidentally, Greece’s current debt to the EU is said to be about 329.3Bn Euros in 2021, which is much smaller than that of France (2,438.46 Bn Euros), Italy (2,431.08 Bn Euros) and Germany (2.107.43 Bn Euros), in the same period.
Those in support of further restraint suggested, that in reality Greece was able to manage its problems better and produce an economy that was later fit for purpose, after a prolonged period of austerity policies. The rational for the application of austerity policies, are often associated with a political decisions, to reduce a country’s fiscal deficit. Characteristically austerity programmes focus upon, reducing public expenditure, to increase tax revenues and can involve the selling off of non-financial assets. This includes Government buildings and land for instance to raise funds, rather than rents, which also impacts Government income negatively. This can lead to future borrowing, with lenders and creditors being willing to take on some debt, in the form of Government Bonds, which are bought at lower risk on open markets, but if the risk is too high, investors are less likely to invest, without caution or more realistically not without higher interest rates or returns. Therefore, if a country is unable to manage its own fiscal policies, then trade in these markets become more high risk and less attractive, unless there is a better rate of return, but interest rates cannot simply be adjusted for this purpose without having an impact on household economics, the result of which are cycles of debt for the poor and collapsed housing bubbles.
Responsible borrowing and lending is essential, as Konzelmann explains, it is for Government to keep debt and borrowing within safe boundaries.[5] This has inevitably resulted in some push back on to households, where incomes have contracted or failed to grow; with rolling back of state social security schemes and real cutbacks to health, education and social infrastructure projects have a direct impact on life opportunities for generations. Inevitably this long-term picture demonstrates that without proper state investment in these cycles of debt and sometimes booms, (as there is always some growth in the economy), important functions of the state will deteriorate and decline overtime.
Konzelmann is clear that there is not set agreement or science as to when austerity policies were perceived to have been necessary. She does, however, reflect upon the development and concepts and ideas which shaped austerity policies today from a historical perspective, which sheds light on austerity ideas in Britain from the late 1880’s to 2008. The revival instead of Keynesian ideas were used to justify continued borrowing again after the 2008 Financial Crisis, by The Chancellor Alistair Darlying, in the UK. There was in fact something familiar about this new crisis, which enabled and justified large scale public borrowing.
Economists study discreet areas of economic crisis and ‘boom and bust’ in the global economy, some of these are depicted below and have been heavily analysed by academics worldwide. The IMF Historical Public Debt Database, working paper 2010, sets out these periods of historical interest from 1885-2010, on a world IMF data mapper. It depicts G20 countries, G20 Emerging and Low-Income Countries in relation to their ‘Debt percentages of GDP’. This is depicted in a graph as “Debt-to-GDP Rations Across Country Groups 1880-2009”.[6] These moments of high debt occurred in the G20, in 1922 after World War I and the 1918 pandemic and more dramatically in 1945 after World War II. These peaks concur with Susan Konzelmann’s analysis that the proportion of average public debt to GPD was about 116.2% in 1922 and 144.6% in 1945. The inter-war periods also show a drop in debt-to-GPD ratios and a rise from 75.4% in 1929 to 94.7%, during the Great Depressions in 1932.
The London School of Economics (LSE) have recently provided similar studies during the pandemic, to demonstrate the way in which public debt impacts the economy in moments of economic crisis. Like almost all economists Susan Konzelmann describes a period of greater regulation in financial markets, as Woodrow Wilsonian institutions, after World War II become established, and where more tightly regulated governments are managed by institutions, as countries become their own mangers of macroeconomics after prolonged period of war focused activity.
All data shows a drop in public debt in the 1950s (Konzelmann statistics are 70.7% GDP) and a decline in 1960 to about 36.5% in the 1970’s and 34.0% by 1974. This does not take account of the OPEC oil crisis, which impacted the USA, Middle East and Latin America. This does not tell us how well people were living at the time or how the economy impacted their daily lives, although it demonstrates reduction in debt to GDP proportions. Austerity in another guise. Public debt she argues rose steadily with borrowing in 1999 and again in 2011. The chart below brings together independent data from the International Monetary Fund (IMF) on the proportion of Government Debt to GDP for specific countries selected for this study from 1945-2019. The chart brings the reader to a similar conclusion. This does not include the borrowing undertaken by Governments to support businesses and infrastructure, furlough schemes and social support systems during the pandemic of Covid-19 2019-2020. Instead, this work reflects upon a post-war period, amongst key developed nations, who were involved in war and who’s economies reflect the devastation caused by World War II and subsequent reconstructions and borrowing.
In the 1970’s and 1980’s tight fiscal rules began to be applied worldwide and in developing nations, in Europe it was the Maastricht Treaty and the stability and Growth Pact, which established a European Fiscal framework based on fiscal rules; expressed as deficit and debt limits, which national governments are expected to follow (new use of targets by member countries would reported to the EU).[7] The European Central Bank set caps to deficits and recommended that European Members should not exceed 3% of GDP and that central debts do not exceed 60% of GDP. The ECB was central in promoting austerity, but as pointed out by Jon Shefner and Gary Blad in, “Why Austerity Persists in 2020”, the outcomes of polices were dependent upon and continue to be dependent upon the strength of the economy and the political strengths of a country.
European Austerity
EU membership requires that a countries’ prerogatives are limited within the Union, subsequently there are weaker states such as Greece and Spain and stronger nations like Germany, France and the UK. Limiting the activity of national banks, to buy and sell liquidity and being dependent on a single currency, the euro curtailed independent flexible country response. All these nations had experiences austerity policies and economics during the previous two decades. Power differentials in the European Union, also made negotiations more difficult.[8] Keynesian Economics drove many of the concepts and theories about austerity implementation; arguments being that fiscal stimulus is the ‘best medicine’ in terms of recession, state budgets must be restricted, the expectations were that sovereign bond prices would rise, that bank lending would increase and that all rational arguments for austerity are understood politically.
Economist at the time were in favour of austerity concluded at if there were more stringent rules, that there would be more fiscal discipline. What was not clear at the time was whether institutions themselves were the driver to improving results and to what degree. Mark Hallerberg (et al) conducted an investigation in 2004 on whether appropriate frameworks impacted outcomes for European countries who adopted austerity measures, and what role institutions might have on their outcomes. The study was published by the European Central Bank (ECB), The Design of Fiscal Rules of Governance in European Union Countries, as a working paper that year. Those studies showed in 2006, that dependent upon the political structure of a country, either a contract or delegated approach would be applied, where inappropriate use of a framework could result in poor economic performance.
Final investigation showed that countries such as the UK used a delegated approach, where strategic powers are vested in a Minister of Finance rather than Heads of Departments, where he or she is then able to consider the budget comprehensively. The Executive will have strong agenda setting powers and because of the political arrangements of single party majorities, the budget is not likely to be rejected by Parliament or succumb to amendments. At implementation Ministers are more likely to move to any deviations from the agreed economic strategy. Similarly, they can ignore targets and variations when it no longer suits the political rational of the day. Both Greece and Italy began to implement some of the delegated approach as economies were fragmented, which decreased disintegration. Spain also implemented delegated frameworks.[9] Contract based frameworks were applied to Germany and France where coalitions of parties in the Legislature are more common. Finance Ministers control and monitor agreements with institutions, and they have little power at the planning stage of a budget. The legislature has the powers to ask for information about the strategy of the budget to greater detail, but at implementation the stage, the contract between the Executive and Institutions appears to be like that of the delegated approach, where the budgets are strongly monitored, and Ministers have the powers to correct deviations.
Austerity could not prevent, prolonged recession in the global economy; public debt and high levels of borrowing by nations which resulted in decline in GDP, where borrowing become too expensive for most nations. These result in expensive consequences and impact real jobs, salaries and the public health of nations.
The Financial crisis and Government Debt in the global economy
The impact of the 2007-8 Financial Crisis on these countries is clearly visible. Government debt continues to escalate for all countries. For Governments such as those of Greece and Japan the proportion of debt to GDP is significant from 1995. After 1995 there is a trend in escalation for all countries presented in the data including German and France, Spain and Italy (not presented here). However, this is much less significant for the UK, USA, Germany and France, than in Greece, where Government debt has come under control in the last six years and in Japan which in 2019 had a % of Government Debt to GDP of 237.95%. The new Prime Minister Suga Yoshihide and elected party leader may seek to try to make changes to the economy, as the Liberal Democratic Government tackles Covid-19 and debt in the economy.
Japan having been a competitive successful and technology producing country since 1985 and had experienced a variety of technological developments and diversification in companies which dominated the markets in the 1990’s. These include Fujitsu, Hitachi, Canon, Panasonic and Sony, which produce products that reach and dominated global markets. In 1991 Japan suffered a financial crisis and has continued to suffer ‘three lost decades’, with competition from China and India, it continues to struggle to recover from being now one of the lowest producing nations (but not relative to size). In 2018 amongst G7 countries and carries one of the largest levels of Government debt of any country since 2013. Government debt is something austerity policies were intended to reign in. They were applied across the European Union and by and large economists have favoured a ‘tighten your belts mentality’, which challenges welfare concept. The graph above shows some trend towards suppression of Government debt. In some way austerity delivered what it said on the tin and Greece remains an example for economists of successful restraint in the EU.
Research Capacity Graph based on IMF data from 1950-2019 (5 year intervals) % of Government Debt to GDP. (Looking forward Part 5: The impact of Brexit, Covid-19 and War in Ukraine on Global Food Security. May 2022 By Rocio Ferro-Adams | Rocio Ferro-Adams (please cite if using this work at Research Capacity) – Academia.edu
In May 2010, the Greek Government, The IMF and European Central Bank (ECB) announced an austerity package for Greece, which was approved by The Hellenic Parliament. Austerity was described as a vital response to imbalance in the economy of the European Union and a means of controlling government deficit. The main concern amongst nations was associated with fear about destabilisation in the Eurozone and contagion of poor an expensive Government Debt bought by Banks across the EU. They no longer wanted to carry the risk of what began to be considered as ‘bad government debt’ and Greece would have to carry the burden of Government Debt itself. Greece’s welfare state was targeted as the root to indebtedness, low interest loans were stopped, and this was replaced by tight credit and much tighter interest rates by the ECB were applied, but not immediately, which allowed banks to borrow and to buy Greek Bonds.
The Hellenic Observatory and Hellenic Bankers Association met at the LSE in October 2020, and discussed the opportunities and risks now facing Greece following Covid-19.[10] Once out of control in the European Union, Greece is said to be in better shape after a strict programme of restraint and subsequent digitalisation, it is in a better a position to better mobilise resources, to target health issues and financial resources during the pandemic; investing in technologies for test and trace, targeting health services and treatment. Greece is demonstrating it can use expenditure differently during the Covid-19 pandemic[11]. France also is beginning to see opportunities through the availability of an EU Central Fund, where some 750 Euros are held for European Member states, to provide support and stability during the pandemic. How this money is spent will provide an insight into how countries cope within their own economic constraints throughout 2020-2021.
A need for growth and investment in the Economy post-Covid 19
There appears to be no immediate remedy for global problems. What economists do know is that growth is essential in the global economy. It means that there is more money, which improves the lives of people. In having more money there is the opportunity to create different outcomes through investments in Research and Development, Education, Health and Technology Infrastructures (digitalisation) and transport. Stagnation of real wages impedes growth for this reason, so does slow productivity which is associated with wage inflation. Lower Government debt is more desirable as it limits risks in investments and that is one of the ways of attracting positive credit ratings and Foreign Direct Investment (FDI).
Keynesian measures were preferred between 2010-2015, they show small stable growth in the economy in this period. In fact all G7 countries show some positive-growth, ranging from 0.8%-2.4%. Amongst emerging markets, China continues to perform strongly with 11.4% real growth to GDP in 2005, 10.6% real growth to GDP in 2010, and 6.9% real growth to GDP in 2015. Brazil also showed continuous positive growth from 2000, it demonstrated a 4.4% real growth to GDP. In 2005 the Brazilian economy grew from 3.2% to 7.5% in real terms by 2010. However, it has since suffered a serious decline in growth from 2015, where the economy contracted to -3.5% GDP.
Compare these two emerging market economies to G7 performance during this same period. There are small declines in economic growth from 2000-20015 in both the USA and UK. The economy in the USA began to contract from 2000 in real terms, from 4.1% in 2000, to 3.5% in 2005, to 2.6% in 2010 and up to 3.1% in 2015. The UK economy began to contract in real terms from 2000 from 3.4%, to 3.2% in 2005, to 1.9% in 2010, and grew in real terms to 2.4% in 2015. All G7 countries have experienced negative growth since the pandemic of Covid-19 began in March 2019. Economies have contracted considerably in 2020 during the Covid-19 pandemic. The UK economies contracted in real terms to -9.8% of GDP, the USA to -4.3%, Germany to -6.0%, France to -9.8% and Japan to -5.3% and Italy, one of the most-hardest hit countries in economic terms, to -10.6% in real terms; whilst Canada’s economy contracted to -7.1%. Amongst the nations illustrated below, China remains most able to cope within the global economy.
Research Capacity Graph IMF data from 1980-2020 (5 year intervals) % of Real Growth to DGP.
In 2020 the world entered a global recession, precipitated by the Covid-19 pandemic, the fourth most server recession in 150 years, exceeded by two World Wars and the Great Depression. The World Bank projects that the global economy will expand to 4% in 2021 after contracting 4.3% last year. Modest growth is expected and if you take out China, and this would amount to a 3.4% growth.[12] This is a subdued recovery, also experienced in emerging markets which are expected to expand no more than 5%, this year, mostly found in China. Debt defaults and financial stress could result in income decline worldwide. Debt-related risks which were already visible and debt relief may be necessary for those countries hardest hit by the pandemic. Global potential growth has slowed. The World Bank is promoting green sustainable infrastructure projects as a way of reversing the damage caused in the global economy, establishing the adoption of environmentally sustainable technologies, supporting stronger growth and stimulus packages which will encourage environmentally sensitive projects that create jobs and bolster productivity.[13] The present recession has planted the seeds for future crisis.
United Kingdom Case Study
Some economists are now advocating less austerity and advocate refocusing on growth, so that there is more possibility of sustainability through clean technologies, greater production and restructuring of the workforce to enable better skilling of the workforce for manufacturing jobs, rather than white collar professional work. This is particularly true it is said of the UK, where production is low and those without university degrees can be without work for longer periods of time.[14]
This argument for growth focused economics is a strong one, given that debt is likely for all households; the most wealthy, middle class, working class and poor. Traditional economics would advocate more austerity, stimulus and tax rises. The problems since 2010 in the UK has been that that the middle classes are already ‘squeezed’, as experienced in the UK from 2010-2015, the graph above shows the economy shrank, this took place without increasing production and increasing jobs, although household consumption levels rose, during this period real growth remained modest.[15]
Although the OECD and IMF predict reasonable and confident recoveries for all G7 countries in 2021, this will not be completely tested until the end of 2021. Tax rises for the very rich who are the top 5% of earners, will raise money for the Treasury, but in reality, it does little for long term growth. Investment in research and development, the creation of new markets and new good quality stable long-term jobs in manufacturing (not just for the young with new degrees and qualification), will be better for the economy. Interest rates remain low, which encourages some stimulus and borrowing, but also more debt, which is unaffordable. There is a limit to debt and how much the real economy can absorb, particularly if there are insufficient quality new jobs in the economy that provide stable incomes and pensions for working adults, into pensionable age.
Professor Jon Van Reenen at LSE also presents a case that economists understand the real need for economic stability and the potential impact of growth on the environment; therefore he suggest that new areas of economic growth will more likely appear in Artificial Intelligence, New Technologies, Gene Therapies and Green Technologies.[16] These are the new opportunities for growth in jobs in the global economy, especially for those countries willing to invest in new technologies and research and development, creating new long term manufacturing jobs.
UK employment rates in the three months from September to November 2020, were estimated at 75.2%,[17] yet the Office for National Statistics (ONS) also show that the UK unemployment rate is 5%.[18] 59.6%[19] of women aged 16-64 are economically active, this does not describe sufficiently the number of hours worked by women in a week, nor their levels of pay per hour or the type of economic activity in which they engage in relation to their educational attainment. Younger women with degrees may be more engaged in the economy, than older women aged 35+ with children. Between 2014-2020 ONS figures consistently demonstrate that more women are on zero hours contracts than men. By July-Sep 2020, the gap between the two groups, remains about 112,000 more women employed in short term, low paid work without professional pension pots, than men who totalled 417,000 zero-hour contracts. In total there were 946,000 people registered in the UK employed under these contract conditions in the Autumn of 2020.[20]
Good Management Practises
In addition to reinvesting in manufacturing to improve production to create new internal markets and to create new manufactured products to grow the economy. Good management practises and better understanding about needing to improve employment conditions will help employers understand how to better grow employees and businesses. Modern ‘zero-hours’ contracts were created decades before, but were reintroduced in 2011, to provide flexibility in the economy; to provide fast and cheap labour, at low cost to the employer; as there are fewer overheads, lower pay and conditions offered. People employed under these contracts are marked by ‘lower bargaining power’, impacting union membership, as many were no longer covered by adequate pay conditions and employers could demanded exclusivity until 2015 (employment law was updated by the Small Business, Enterprise Act 2015 to end exclusivity).
The working conditions for many women had deteriorated from 2010, with confusion about employment legislation and rights, implemented under the Labour Government, the new Conservative Government brought back attitudes from its previous administration under Thatcher, which assumed many of the rules on working mothers did not already exist, lowering expectations about flexible hours and employer responsibility to provide jobs with different working patterns. Zero hours contracts were intended to provide flexibility in the economy by creating flexibility for employers and presumably choices for the employee. In reality it was women with families, the most vulnerable and the poorest sectors of communities who were left behind, including people from more diverse family backgrounds, whilst younger people and students benefited from the work available through such multiple contracts.
This shift in attitude in the market along with austerity policies, where the responsibility for employment protection, under the law, was successfully pushed onto the employee, rather than employer. It saw a shift in perceived and legal responsibilities in the work-place; giving even the public sector the ability to move permanent staff onto more flexible arrangements, and or the authority not to have to explain changes in employment status, pensions, salaries and terms and conditions. This undid much of what had been achieved in the decades before, assuming instead a different interpretation of the law, was now required under new and potential Brexit conditions as the Government waited for an EU Withdrawal Agreement after the 2016 Referendum. In response to discussion about insecurity in employment the issue of ‘no rights’ for employees began to be addressed during the 2017-19 Parliament.
The May Government brought forward A Good Work Plan, to reform employment law to make it easier and better for business. It began to address some of the more difficult questions, which had exposed employees to such harshness in the economy and to prepare the way for Brexit, changes perceived necessary and flexible which would be suited to Britain post-Brexit. In July 2017, the Taylor Review of Modern Working Practices, was published, which intended to keep to pace with changing business practices in the modern economy. In accepting 51 of 53 recommendations, The Good Work Plan set out how the Government intended to implement change through legislation on zero-hours contracts, which included transparency and enforcement of employment rights it was labelled, “the largest upgrade of workers’ rights in a generation”.[21]
The Taylor Review provided the following conclusions on the problem of employment in both, the quality of the work available in the UK, to the level of skills that can be found in the workplace, which was identified as ‘under using skills’ in employment. It also identified a lack of knowledge and adequate levels of ‘good practises’ in applying employment legislation. This is identified in some cases as a lack of awareness and knowledge, as well as a lack of good legal practise with regards to employee rights and employer responsibilities. The report covered a number of areas; quality of work, evolution of the labour market, clarity in the law, one sided flexibility (arrangements that benefit the employer over the employee), the need for responsible business practises, fairer enforcement and incentives over tax in the system, and the desire for scope for development in working practises as well as the opportunity to progress in work. It was found that there was a need to deal with issues like, “unpaid wages, and uncertainty over employment status and terms and conditions is a cross cutting-underlying issue throughout, [this included three top issues]; unauthorised deductions of wages (experienced by 26% of enquiries), unfair dismissal (19% of enquiries) and poor Terms and Conditions in employment.”[22] Two Parliamentary Inquiries found employment difficulties in UK amongst The Business Energy and Industrial Strategy Committee’s, ‘future world of workers inquiry’ and ‘The Pensions Committee self-employment and The Gig Economy’ Inquiry (which touch upon bogus self-employment claims).
The Taylor Report showed some interesting findings, women aged 35-49 were less employed than men over the age of 16+, whilst showing a high employment amongst those aged 50-64 (1997-2017).[23] There was also a growing trend for people desiring to work more hours since 2005-2015, (2002-2017) and a significant drop in full-time employment from 2008-2010, which has remained consistently lower than in the previous decade until 2017.[24] Full-employment accounted for 60% of the Labour Market in 2017, part-time work accounted for 26.2% , where self-employed people were found to work part-time more often. The EU (28 countries) average for part-time work amongst employees was much lower at 17.7%. Real weekly average earnings also fell during 2005-2014 and did not fully recover in 2017.
In the UK the Office for National Statistics (ONS) reported that regular pay is now at its highest level since the series began in 2000, whereas total pay in 2019 remained about 3.7% below its peak in 2008. Annual pay in total pay remained at its weakest in wholesale, retail, hotel, and restaurant sector at 1.1% and the manufacturing sector at 2.7%.[25] There is therefore a concern for pay in these areas and their importance has been highlighted by increasing difficulties during the pandemic. Increasing jobs in manufacturing and pay in this area should be refocused from 2021, developing skills and investments in key manufacturing sectors.
The challenges to the UK economy and employment found in 2017, are not dissimilar to those found in 2019 and 2021. The impact of employment problems in the economy were already present some years ago. Employment concerns were already described in detail prior to the pandemic. The concerns included poor real wage growth, although the national living wage had helped to improve working conditions. Poor productivity growth in pay, was real (following a decade of poor productivity growth and pre-existing international productivity gap following financial crises).[26] Forthcoming changes to employment law by the Boris Johnson Government will help, but the law must target and support those most at risk of poverty, by increasing their rights in the workplace to enable their economic security. Legislation providing the means of cementing economic disparity and social immobility, would not be a good sign for an economic recovery.
The short-term Future of Britain
The Good Work Report recommended investment in infrastructures, to focus upon ‘improved skills levels’, improvements in ‘greater technical advancements and the importance of delivering a modern industrial strategy. In February 2021, The London School of Economics (LSE) leading economists also identified similar problems and stated a need to invest in Research and Development, improving skills in digitalisation and Tech, and Artificial Intelligence implementing better modern management practises. They also advise on the difficulties of increasing taxes after a financial crisis and the limits of increasing Government debt without furthering crisis during the Covid-19 pandemic, but instead, refocuses the argument for better employment opportunities and investment.
Although conversion of debt into Bonds is a traditional means of tackling government debt in the economy, there is a weakness in selling public debt in the form of a Government Bond. New UK Bonds may be more interesting as part of the EU (28) Club, but Brexit provides a mixed bag of opportunities and diplomatic problems for Britain and Norther Ireland post-Covid-19, which have not yet been played out fully in international relations and the global economy. All government energies have been employed in tackling the Covid-19 virus, invested instead in healthcare systems, education, and furlough schemes, preventing further damage to the economy by the disease.
There are high risks now to the UK Economy. In October 2020, the government announced an extension of the Coronavirus Job Retention Scheme (CJRS), which had been announced on 23 March 2020, the Furlough Scheme would remain open until December 2021, with employees receiving 80% of their current salary for hours not worked. Mortgage Holidays were extended for a further six months and business grants were provided, to protect 9M jobs.[27] The Office for National Statistics (ONS) shows continued borrowing by the UK Government to cushion the economic impact of the Covid-19 pandemic. Public Sector net debt (excluding public sector banks, PSND expenditure) rose by £316.4bn over the first 10 months of this financial year to reach £2,114.6bn at the end of January 2021, or 97.9% of gross domestic product (GDP); maintaining a level not seen since the 1960’s.[28] Public Sector net borrowing is estimated to have been £8.8bn in January 2021, £18.4bn more than January 2020, the highest monthly borrowing since records began in 1993 and the first recorded January deficit in ten years.[29] Central Government tax receipts are estimated to have been £63.2 bn in January 2021, £0.8bn lower than in January 2020.[30] Public Sector net borrowing is estimated to have been £270.6bn, £222.0bn more than in the same period lasty year, the highest public sector borrowing in any April to January period since records began in 1993.[31] The economy is at crisis, but what is the remedy?
It is important to learn from the Greek experience, which was economically isolated in the EU for some years and although Britain and Northern Ireland had a stronger economy than the Greek economy in the EU before 1 January 2021; with the pressures of pandemic and Brexit, the case provides the possibility of understanding different scenarios (risks), which could play out in the global economy within the next five and ten years.
There is some positive evidence of growth in retail online sectors in the UK economy, which suggest that although there has been a pandemic, people’s earnings in some sectors of the UK have been unaffected (this includes those on furlough), in others such as the arts and entertainment, and other retail areas the damage is acute. Lockdown is encouraging people to save, this is particularly important for those who work part-time, women at home, families who pay for education (and higher education), and the self-employed saving for their futures[32]. These savings have become more important as the numbers and diversity of people in work changes, these are mostly people who cannot access private company pension pots. These savings enable social mobility and prevent many families falling into the risk of poverty in later life. The traditional view that to save for the future is sensible should not be discouraged; as the attitude of unleash uncontrolled spending, debt and credit created the last financial crisis and must be avoided. It was both judged as deeply irresponsible in creating poor behaviour and lacked sufficient regulatory monitoring, and implementation of regulation, to reduce high risk behaviours in all sectors of the economy, leading to banking collapse.
The losses hurt the public and voters who were not in jobs which provide them with redundancies and corporate pension pots. Savings are a healthier sign of a nation, which is able to deal with responsible spending and does not encourage greater public and Government debt. These are the dangers of expecting growth to come from spending and credits, whilst all responsible economic advice should be one based on refocused economic growth, more largely dependent on production and industrial strategy, growth in skills and employment.[33] The UK Chancellor indicated this month that £43bn black hole must be filled by rises in income tax assuming that employment figures rise or remain as expected. This must not include the income tax no longer collected from an estimated 1.9 EU migrants who have now returned home following Brexit on 31 December 2020. The Chancellor also acknowledged publicly, that debt could not continue to rise indefinitely, and that the UK was vulnerable to a rise in interest rates. The question remains as to how much income tax can actually be raised during this pandemic, and whether employment rates will remain within the Chancellors expectations. It is however already expected that, Corporation Tax will be raised from 19p in the pound to 25p to further collection of tax.
In addition to these stresses caused by the pandemic, which have become essential tools for managing transmission of the Covid-19 disease, early signs of problems have arisen in early January 2021, concerning security and import arrangements with Northern Ireland requiring a protocol with the EU to settle the new arrangements, in early January. These arrangements require political and diplomatic agreement and investment in negotiation within The Executive Government (with investment in the New Ministerial Positions) and the EU, creating Departmental shakeups. The need to have better political and diplomatic arrangements in place to negotiate policy arrangements that stand post-Brexit with the EU, are now essential for the future.
These new arrangements must also be reflected in the UK parliament through scrutiny committees and their wider institutions, drawing on Government governance to enable a workable EU/Brexit Policy Framework to evolve post-Brexit. The framework must develop to allow Government to mitigate policy problems, and to develop adequate policies (as Brexit is implemented) and to enable scrutiny of decisions in Parliament. Brexit cannot be allowed to collapse and cause further damage to the economy and political institutions (even if it was not recommended or supported by all voters), this is particularly true during an economic crisis. The alternative for some voters would be reintegration into the EU, but many economists may prefer further stability to the political institutions, which can then refocus and mitigate further shocks to the economy. The current Government is committed to Brexit and will look to stability to limit further shocks, by remaining on the current trajectory and plans for a post-Brexit future.
Current polls show a 5% swing towards those who believe that in hindsight, the UK was wrong to vote to leave the EU, (from 173 YouGov Polls conducted between 2017-2021).[34] The Times YouGov Poll in February 2021 indicates that 51% of the UK voting population believe that the Government is not handling Britain’s exit from the EU well. But is it enough evidence that large sectors of the public would vote to reintegrate back into the EU at a later stage if asked? It may be too soon to tell for economists. In the short-term the UK economy needs urgent action now, for any serious consideration of such a scenario to be evaluated.
This is part of a set of separate chapters on “Looking to the Future Post-Covid-19: An Opportunity for Change in the Global Economy”. Part 4 will focus upon Brexit and Covid-19.
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The London School of Economics. Covid-19 and Economic Recovery in Greece: challenges and prospects. LSE online event notes 28 October 2020. https://www.lse.ac.uk/Events/2020/10/202010271730/greece
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[1] Sue Konzelmanny, Mia Gray and Betsy Donald (2014) Introduction to the Cambridge Journal of Economics, Cambridge Journal of Regions, Economy and Society and Contributions to Political Economy, A Virtual Special Lesson on Assessing Austerity.
[2] Suzan J Konzelmann (2014) The Political Economy of Austerity, Cambridge Journal of Economics, Volume 38, Issue 4, July 2014, p701-741.
[3] Ibid, pages 702.
[4] Ibid.
[5] Ibid, page 4 The Political Economics of Austerity by Suzanne J. Konzelmann :: SSRN
[6] IMF Working Paper A Historical Public Debt Database, WP/10/245. November 2010. @International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/2010/wp10245.pdf
[7] Mark Hullerberg et al (2006) The design of fiscal rules and forms of Governance in the European Union Countries. Journal of Political Economy 23:338-59.
[8] Jon Shefner and Corby Blad (2020) Why Austerity Persists. Polity Press, pages 120-147.
[9] Ibid pages 1-6.
[10] Covid-19 and Economic Recovery in Greece: challenges and prospects. LSE online event notes 28 October 2020.
[11] How Greece has responded to the pandemic, LSE Seminar Series November 2020 Seminar Series. LSE online Event notes.
[12] Data from The World Bank IBRD-IDF on projected economics prospects post-covid-19. https://www.worldbank.org/en/news/feature/2021/01/05/global-economic-prospects
[13] Ibid.
[14] Going for Growth, LSE Seminar Series Online event, Professor John Van Reenen, notes from 8 February 2021 Seminar.
[15] ONS Data Consumer Trends, UK: January to March 2015. https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/bulletins/consumertrends/2015-06-30
[16] Ibid.
[17] Office for National Statistics (ONS) figures February 2021.
[18] Ibid.
[19] ONS figures A02 SA: Employment, unemployment and economic inactivity for people aged 16 and over and aged from 16 to 64 (seasonally adjusted) – Office for National Statistics (ons.gov.uk) February 2021.
[20] ONS figures Comparison between zero-hours contract estimates based on the current and the new methodologies – Office for National Statistics (ons.gov.uk) February 2021.
[21] House of Commons note, Employment Law in the Modern Economy, The Good Work Plan, 3 January 2020. https://commonslibrary.parliament.uk/employment-law-in-the-modern-economy-the-good-work-plan/
[22] Ibid page 8.
[23] Ibid page 20.
[24] Ibid page 23.
[25] ONS Real Wage Growth 2017-2019 data.
[26] Ibid page 28.
[27] HMT.gov.uk https://www.gov.uk/government/organisations/hm-treasury.
[28] Public Sector Finances, UK: January 2021. How the relationship between UK Public sector monthly income and expenditure leads to changes between UK public sector monthly income and expenditure leads to changes in deficit and debt. https://www.ons.gov.uk/economy/govermentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinance/january2021.
[29] Ibid.
[30] Ibid.
[31] Ibid.
[32] Note from The House of Commons Treasury Committee, Wednesday 22nd February 2021. A discussion on Equivalence, Location Policy, the role Banking and Clearing Houses and economic growth and the impact of savings on growth dependent on spending and not production.
[33] Going for Growth, LSE Seminar Series Online event, Professor John Van Reenen, notes from 8 February.
[34] What the UK Thinks. https://whatukthinks.org/eu/questions/in-highsight-do-you-think-britain-was-right-or-wrong-to-vote-to-leave-the-eu/ Also See; The Times Poll by YouGov, Nat Cen Social Research. https://whatukthinks.org/eu/poll/yougov-18-2-2021/
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