Jonathan Eida | Opinion
Coronavirus has hit our economy like a tonne of bricks! Without a doubt, it has been the worst period for business since the 2008 financial crash. It has left many businesses on the rocks and people without any livelihood. These are truly worrying times for everyone.
To put it in perspective, during the first three months of this year, the UK experienced its sharpest economic contraction since the peak of the financial crisis (Q4 2008). According to the Office of National Statistics, March 2020 was the fourth-largest monthly fall in production output since records began. Significant falls previously occurred in February 1972 and January 1974 (7.9% and 7.2% respectively, because of the miners’ strikes), and January 1979 (6.9% because of the “winter of discontent”). The number of people claiming unemployment benefits also increased by the most since records began in April to reach almost 2.1 million, an increase of roughly 856,500 claims.
Like most other economies around the world, the attention must now turn to a plan to lift ourselves out of the economic rut we currently occupy. Once the lockdown ends and the virus is under control, whether it be before or after a vaccine is found, the economy will need emergency resuscitation to get it back to life. Businesses cannot, as it currently stands, simply pick up from where they left off considering the amount of damage has already taken place. They must be given the help they need to get off the ground, so that they can continue to provide jobs and economic growth. However, just how we do that is an entirely different question.
Big governments, such as ours, usually have a quick and easy solution to these types of problems. It generally involves borrowing a heap of cash from the banks, before throwing it at businesses and sitting with their fingers crossed, hoping that everything will turn out okay.
The most notable example of this form of policy was after the Great Depression in the 1930s, which set the precedent for future bailouts, including that of the 2008 economic crash. Franklin D. Roosevelt, in his New Deal, spent $41.7 billion at the time. In modern money, this is equivalent to $653 billion in 2009 US dollars. This was also in and amongst other policies designed to raise unemployment and revive the economy.
However, the consensus nowadays among economists is that the New Deal did more harm than good. In 1939, after almost two full terms of Roosevelt and his New Deal, unemployment had not dropped, but had risen to 17.2 percent, which worked out to be nine-and-a-half million Americans unemployed. In 1931, the year before Franklin Roosevelt was elected President, unemployment in the United States stood at 16.3 percent, or around eight million. Studies also suggest that the New Deal lengthened the Great Depression by around seven years overall.
Among the reasons given for why the effects of the New Deal were more harmful than good was the fact that the money borrowed to fund the increase in spending needed to be paid for, and taxpayers began to shoulder the blow, negatively impacting business. Other reasons given for the failure of the New Deal include the fiasco of policies aiming to artificially increase the value of money, based on flawed economic theories.
The fact of the matter is that we have already been projected to spend around three hundred billion pounds to keep businesses afloat through this lockdown – any further spending is bound to have grave economic consequences down the line. At present, we may feel the extra spending for generations to come, with our children being those forced to pay the bill. With this in mind, it seems to me inconceivable that the strategy we choose to follow should involve more spending – it simply cannot be seen as an option.
The problems that businesses currently face can all be put down to the fact that the market is currently a very high-risk environment. Businesses function at their best during times of little risk and the promise of high reward. However, businesses are presently finding themselves in a chokehold. There is great uncertainty in the market due to the global pandemic, with the threat of a second wave and so forth, which means that visibility is impaired for both businesses and consumers. Thus, businesses will begin to focus on cutting costs rather than growth, which affects the economy. It is also worth noting that, with more uncertainty, consumers are less likely to spend.
There is then the fact that government regulations and taxation on businesses continue to apply pressure on them, manufacturing further risk in the background. All in all, businesses are being squeezed to their limits!
If the Government were to pursue a high-spending methodology, there would eventually be an impact on businesses, either through taxation or increasing the monetary supply – leading to higher rates of inflation. Neither of these options decrease the risk to business; rather, on the contrary, they would be increasing the risk.
The method we pursue to restore business growth must include risk reduction strategies, which would give businesses and business owners the confidence to progress and provide them with more security. The chokehold that businesses are currently under must ease if we are see a bounce-back in our economy.
The first action that the government must take is to reduce corporation tax rates. The lower the business costs, the more wiggle room they have to make necessary decisions to ensure their businesses grow. Taxation is a problem at the best of times, especially for small business. At present, when revenue is down for most businesses, lowering business costs would give them more breathing room, in turn increasing their chances of survival through the fallout of the pandemic.
In relation to the previous point, it would also be appropriate to reduce income tax. Many families are feeling the squeeze as a result of the pandemic. Giving more flexibility to households enables them to take more risks and play their part in keeping businesses going through consumer spending. During a global crisis, the natural response is to save money so that if the situation gets worse, people would retain some security. Giving people that reassuring flexibility to spend, without fear of bankruptcy, can only be good for business.
This leaves the issue of paying back the debt that we have racked up as a result of the virus so far. This is an expense that will have to be paid back, either by us or by future generations. As previously stated, raising taxation on businesses would cripple our economy. A more appropriate solution would be to redistribute our current public spending cache to cover the coronavirus-related expenses. That would maintain business security, without plaguing us with endless debt. Our public services may suffer for now, but the long-term benefits to society as a whole outweigh this consideration.
Being fiscally responsible during this time is paramount if we are to see ourselves out of the crisis in a respectable shape. Freeing up the markets and ensuring we do not follow the usual pattern of reckless spending is the only way to achieve this.