After the Covid war, the UK will struggle to win the economic peace

State power and capitalism’s innovation have staved off disaster, but the challenge is long-term

To the dates 4 August 1914 and 3 September 1939 can now be added a third: 23 March 23 2020, the day the government declared war on Covid-19 and announced a lockdown to combat the virus.

It’s strange how history repeats itself. The same mixture of overconfidence and under-preparedness that marked the start of the first and second world wars was evident a year ago. Basic kit was in short supply and the country’s leaders were in denial about the threat.

Recruiting officers were surprised at the physical condition of the men who signed up to fight in 1914. In 2020 the pandemic similarly put those who were poor and in ill-health in particular danger. Even so, the message from the top was that victory would be swift.

As in 1914, that view proved wrong. The government’s initial insouciance about the threat posed by Covid-19 proved disastrous. Rather like in a Thomas Hardy novels, from that one mistake tragedy followed.

Delay in imposing restrictions meant the lockdown was brutal when it arrived. The state has operated as it did in wartime, using emergency powers and suspending civil liberties. Between late March 2020 and the end of April, the economy shrank by almost a quarter. Some sectors – events, night clubs, theatres – were effectively cryogenically frozen.

Having ensured that the UK took one of the biggest hits from Covid-19 of any developed country, the government wanted to unlock as quickly as possible, and was reluctant to impose restrictions again. So last autumn, ministers again argued about whether steps demanded by the epidemiologists to prevent a resurgence of the virus were worth the economic cost.

With late autumn came a second four-week lockdown in England – with similar restrictions in the other countries of the UK – followed by an easing in December and then the re-imposition of the much tougher curbs in January that are only now being gradually eased. The economy is a little shy of 10% smaller now than it was at the time of the December 2019 general election: a colossal fall.

While costly, the current lockdown has proved less damaging than the one last spring. In April 2020, national output crashed by almost 19%. This January it fell by less than 3%. One of the key lessons of the past year is that economies adapt, and can do so quickly. The proportion of online retail sales has doubled over the last 12 months, and working from home has become the norm for millions of white-collar workers in both the private and public sectors.

These shifts should, perhaps, come as no surprise, given that in both 1914 and 1939 there was a rapid transition to a wartime economy as production lines switched from consumer goods to munitions.

Now as then, financial orthodoxy was abandoned. The furlough, business support, higher welfare costs and extra funding for the NHS mean the UK is on course to borrow in the region of £350bn to balance the books in the 2020-21 financial year.

Despite waste and fraud, that was still the correct approach, because the alternative would have been business failures and unemployment on a scale never seen before. Indeed, in some cases – for instance, sick pay to encourage infected workers to self-isolate – the government should have been more generous.

Even so, Rishi Sunak’s decision to extend the furlough to September, well after the putative June date for the ending of all restrictions, shows that lessons have been learned from the financial crisis, when tough spending curbs were announced before the economy was strong enough to cope.

The battle against the virus is still not over, but it is possible to draw some conclusions. One is that the power of the state coupled with capitalism’s ability to innovate has spared the UK from the sort of catastrophic slump that was in prospect a year ago. Unemployment looks likely to peak at around 7%. That’s bad, but not nearly as bad as it might have been.

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The second is that while 2020 saw the biggest contraction of the economy in 300 years, the long-term damage will be less severe than that from the industrial shakeout of the 1980s or the financial crash of the late 2000s, even though the falls in output then were much smaller. Businesses are not in trouble because of punitive interest rates or a credit crunch. They are in trouble because the government has decreed that they should be shut. There is good reason to hope that most will be viable when restrictions are lifted.

A third conclusion is that many of the economy’s structural problemsresurface when life returns to something like normal. The problems facing other major European countries, many of them self-inflicted, plus the success of the UK’s vaccine programme means the government’s comparative performance looks less dismal than it did. But the UK went into the pandemic with a low-wage, low-investment, low productivity economy, and that hasn’t really changed. After the war is won, the challenge will be to win the peace.

When that victory will come is still unclear. It’s tempting to see vaccines as a decisive turning point, the equivalent of the Americans arriving on the scene in late 1941, but the struggle might never end but turn into a guerrilla war, a constant battle with new variants of the virus.

The other unknown is whether the Conservative government will suffer for its egregious failures, not just since the start of 2020 but in the decade that preceded it. In 1945 the wartime leader, Sir Winston Churchill, was booted out because voters remembered what the 1930s had been like and wanted something radically different. Then again, history doesn’t always repeat itself.


Larry Elliott

The GuardianTramp

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