At least no one can say it isn’t bold. The United States is fiddling around with some possible cuts to payroll taxes. Most of Europe is stuck with some printed money from the ECB. But the UK is embarking on one of the most radical experiments in modern economic theory, and one that will no doubt be studied for decades to come. With his latest announcement today, a whole 48 hours after his last intervention, the Chancellor Rishi Sunak has effectively turned the UK into a wartime economy.
The Chancellor is offering a deferral of VAT for companies, a tax break for the self-employed, and most importantly of all he is saying the government will pay up to 80 per cent of the salaries of any staff who can’t work but are kept on the books during this crisis. It is the most extensive intervention in the economy ever made by a supposedly free market government anywhere in the world. In effect, we will all soon be working for the government.
Will it work? Up to a point. Wartime command and control economies work in the moment. They rose to the challenge in world war one and two, and it will help us muddle through the battle against the coronavirus. It will stop companies laying off staff as they close down their operations, which means they will be able to bounce back relatively quickly once the virus finally subsides. The people will still be there. And it means that people will be able to keep themselves afloat, and support their families, through the crisis. There may not be a lot to buy in the shops right now, and no one is going out for a meal for the next couple of months. But they can pay for their groceries, keep up with the mortgage or the rent, and maintain their Netflix subscription – and that will make a big difference. The coronavirus recession will be a deep one, potentially 30 per cent of GDP. But it may also be relatively short, with less permanent damage to the economy than we would otherwise have seen.
The trouble is, it will suffer from all the problems of a wartime economy. The longer is goes on, the less efficient it will get, as the market becomes more and more warped. It will create all kinds of weird distortions, as the price signals turn fuzzy, and as demand is sustained without any supply to meet it. There will be fraud, and a black market, and loopholes to be exploited on a massive scale. Most of all, it will be very difficult to come off it. When the UK economy last went onto a war footing in 1939, we didn’t really shake it off until Mrs Thatcher’s reforms of the 1980s. It might take just as long this time.
Sunak has risen to the challenge of the moment, and so, to his credit, has Boris Johnson. They have innovated faster, and potentially more effectively, than any other government in the developed world. It will help, there is no question of that, and it should ensure the UK economy comes out of this crisis in better shape than most of its rivals. But it is a huge gamble – and it will be easier to start this rescue than to stop it.