Achieving budgetary balance in a virus crisis
A proportionate response needs to be adopted in the face of the spread of Covid-19. That was certainly the sense from yesterday’s Budget. A calm and measured chancellor presented this government’s first Budget during very unusual times.
This outbreak has been devastating, initially in China, but now in Italy and Iran too, with many countries anticipating an epidemic in coming weeks, including the UK. The human cost is already appalling. Millions of lives have been disrupted, and countless livelihoods damaged.
Yet the lesson of history is that the economic effects of any epidemic are recoverable. Economic shocks such as this outbreak tend to have temporary effects on economic activity, which is then recovered quickly once the crisis has passed. Resilience is key.
Certainly, the immediate economic impact of the Covid-19 outbreak is evident: extended factory closures and travel restrictions are already hurting economies through weaker consumer and business spending. The Chinese economy, which was already slowing before the virus outbreak, will almost certainly contract sharply in the first quarter of this year.
In recent weeks, the crisis has become one that threatens the global economy through disruption to the supply of goods, services and labour. The effect of lockdowns, such as those in China and now in Italy, is to bring discretionary spending to a virtual standstill — travel, leisure and tourism spending dry up.
The economic risks have been illustrated in global financial markets, with big falls in equity and oil prices and a flight by investors to “safe haven” assets such as government bonds and gold.
The OECD has cut its 2020 world GDP growth forecast to 2.4 per cent from 2.9 per cent, and warned that in a worst-case scenario growth could be just 1.5 per cent. This would qualify as a global recession, the first since the global financial crisis of 2008-09.
What is vital now is that there is an appropriate policy response that ensures this crisis does not turn into a liquidity or credit crunch that results in unnecessary company failures, job losses, and further loss of economic activity.
There is plenty that can be done, and already we are seeing action. Yesterday, the Bank of England cut interest rates by 50 basis points to 0.25 per cent, joining other central banks that have eased monetary policy, including the US Federal Reserve.
Today, the European Central Bank is expected to ease policy too. But central banks can take other measures, such as providing cheap funds to banks — with the condition that such funds are loaned to those suffering economic harm. The Bank of Japan has already done this.
Of course, governments have a multitude of responsibilities in relation to the crisis, primarily managing the public health response. But there is a lot that can be done to help companies and households survive short-term financial hardship. Temporary tax cuts, delayed tax receipts, wage subsidies and increased benefits are all in the fiscal toolkit.
On a macro level, many governments are able to borrow at historically low interest rates and use public spending to pump-prime economic activity. For example, the UK government can currently borrow for 10 years at a rate of just 0.3 per cent.
Many — maybe even most — businesses across the globe have been affected indirectly by the outbreak. They have had to use their ingenuity to keep supply lines open and their people safe.
I am certain that lots of organisations have experienced similar challenges to our own at ACCA, where we have adapted new remote working practices for our staff, and taken precautions to keep our students safe by cancelling some of our exams in March.
I know that the priority of all businesses is the safety of everybody in their care. Commercial considerations are secondary, but are also still vital to long-term livelihoods and economic stability.
As chancellor Rishi Sunak said yesterday, coronavirus clearly poses an immediate threat to the UK economy. So it is good to see a significant commitment of funds — “whether it is millions or billions” — to the NHS to help develop resources to fight against the virus.
Sunak has also offered a key lifeline for businesses as the UK prepares for up to 20 per cent of the workforce to be unavailable for work at any one time. For businesses with fewer than 250 employees, the government has pledged to refund up to 14 days sick pay — alongside government-backed loans of up to £1.2m to help them weather the coronavirus storm.
Going one step further, £2.1bn is being set aside for a government grant of £3,000 to any business that qualifies for small business rates relief.
The Budget is undeniably bold, and we must be mindful of the impact the coronavirus will have on the UK economy and productivity.
In the meantime, governments, businesses and the public will need to apply the might of their resources and ingenuity in order to keep people safe, and secure future prosperity.
Main image credit: Getty