Balancing the books

As I’ve been writing this article it has sadly become apparent that despite many of our best efforts, the virus is continuing to spread. This time round there have been suggestions that the economy should stay open regardless of the health risks, whereas others have called for even tighter lockdown measures. Both of these extremes will cause huge damage to our lives, and it is not clear exactly what the right balance is in this lose-lose situation.

But let us consider what social restrictions mean for the economy, both today and in the future when this pandemic comes to an end.

First, because many of us are able to work from home, part of our economy can still operate. Although the economy shrunk by almost 20 per cent in the second quarter of the year, without the ability to work from home, that fall would have been much worse. What we did see close down were shops, restaurants, pubs, and other leisure activities.

When part of the economy shuts down, those working in that sector suffer a loss of income (alongside increased Government spending to pay for the furlough schemes). The other less obvious cost is for us as consumers. Although we haven’t been spending our money down the local pub, we have lost out on the enjoyment we get from going – something economists call our utility. And as social restrictions tighten, we are likely to see the same effects again.

But what happens when this is all over? Can we go back to normal?

Well, that depends on how much disruption there has been in the real economy. If a business closes, it will take time for that economic activity to come back. If millions of us lose our jobs, it will take time for us to find new ones. To prevent this, the quite generous furlough scheme (alongside various business grants) has attempted to put the economy into hibernation to avoid longer-term disruption to the economy. However, this comes with a potential cost to Government finances.

Like the health crisis, there is a balancing act between the cost of preserving the economy today and repaying that cost in the future. And just like the health crisis, it is a tricky choice. If the economy suffers too much today, it will be harder to pay for public services in the future without tax rises. Spend too much today and it is the same problem.

But, as our research shows, if the Government provides less support now and goes ahead with cuts to benefits in April, it will mean a further income hit for the poorest households. To stop a living standards crisis, we have to spend today, then pay it back tomorrow.