In just a few weeks, coronavirus has upended the economy. A record 477,000 people in the UK have applied for Universal Credit over the last nine days – more than any time in the financial crisis. That same week, 3.3 million people filed US unemployment claims – another record.
With UK pubs and restaurants potentially closed on and off for months due to government sanctioned lockdowns – a report from Imperial College expects some form of social distancing to last until 2021 – things don’t look great. If businesses can’t sell, they can’t make money or keep staff.
I worry about loss of jobs, our finances and the steadily climbing overdraft in my Monzo. But should that be the case? Surely, like, society will reconfigure itself and everything will be ok? I spoke to Paul Johnson, director at the Institute of Fiscal Studies (an economic research body) to find out.
VICE: Yeah, so should we be worried?
Paul Johnson: Oh yeah. We’re in a recession already. Economic activity is going to be much lower over the next three months than it has been. I don’t think anyone can make a sensible estimate of the actual impact on the economy, but it’s clearly going to be very big.
So what happens next?
The government is doing its best to help individuals, but there will be an awful lot who lose their job or see their income fall significantly over this period. It’s going to be incredibly tough. The focus of the government’s policy is to try and make sure this is a relatively short run thing, so when we can go back to work, we go back to work. But the risk is a lot of jobs will go more permanently.
There are some very in-demand jobs right now, like delivery drivers, but others less so. What roles might disappear?
We know what’s happening in the short term. Jobs in hospitality and retail are going very quickly. If they start closing down construction, that will be affected too. The big unknown is how many of those will be gone in the long run. If businesses go bust, then those jobs will be gone until new businesses get going. I presume the long run will be in those same areas. Some things will unwind. I presume some of the pubs and restaurants that are shut down now will reopen. But maybe some will have cash flow problems, which means they can’t re-open. The government has been trying to get around this with their guaranteed loans and changes to business rates.
The government is pouring money into helping businesses and people. What will stop them going broke?
We’re clearly going to come out with a much bigger public debt than before. We reckon borrowing this year will be at least a £100 billion more than planned, so £160 billion rather than £60 billion.
That’s also with massive uncertainty. But given the effect of the economic slowdown and the measures already announced, I find it hard to imagine it will be less than that. If it is a one-off cost of an extra £100 billion and everything goes back to normal, the government will cope with that relatively straightforwardly. The debt is £2 trillion, so adding £100 billion is a fraction. The big question is whether the upfront cost is bigger than that and how much smaller the economy is going to be next year. If we continue to go into cycles of lockdown it could become increasingly problematic.
If this shit goes on for a long time, can we expect to see more austerity measures?
I don’t think austerity measures will come in while it’s going on. The risk is if it goes on for a long time and we get into a large amount more debt and the economy recovers slowly, it will make the deficit very high in two years time. At that point you worry about another decade of austerity to get the deficit under control. It’s impossible to predict.
A lot of this sounds quite… bad? Are there any positives?
I’m skeptical. I’m sure there will be some learning from the experience, which individual companies make use of. But I don’t see many silver linings here.
Uhhh… so not good news. What’s going to be the immediate effect in the next few months?
Oh goodness knows. For a lot of people now the hit to their income will be relatively modest because of the job retention scheme. But I still think people will lose income and their jobs. Clearly there are risks for people’s health and mental well being from being effectively isolated for significant periods of time. The big unknown is: for how long? Even those companies who use job retention scheme and keep people on their books, if this lockdown goes on for two, three, four, five months, will they continue to do that or give up the ghost and lay people off completely? I just don’t know.
Great news. Thanks Paul!