Sliding into imprudence

The Covid-19 era is the era of the big state. Governments are propping up workers and central banks are backstopping businesses. But how will everyone extricate themselves from this? Do they even want to?

In Britain, the chancellor and prime minister are locked in a polite arm-wrestle over how far the state should go and when it would be wise to try and balance the books again. Historically, British Conservatives would be appalled to find themselves occupying the commanding heights of the economy.

But coronavirus has torn up the rule book and the current government shows less horror at this prospect than its predecessors, despite railing at what it sees as the incompetence of the civil service.

While chancellor Rishi Sunak spoke of “a sacred responsibility . . . to balance the books” at this week’s virtual Tory party conference, Boris Johnson’s speech was an enlarged version of his pre-Covid vision of a big state.

He promised everything from electric cars to skills training to housing, with only a brief nod to the private sector’s vital role. It was all reminiscent of Mary Poppins: “Oh well. If we must we must,” as she said with a sigh while putting on lipstick and then leading her troops across the rooftops.

Mr Johnson loves grand projects. The combination of low inflation and Covid has given him extra cover to promise more: 48 new hospitals, 20,000 police officers, wind power piped into every home. His original leadership pitch to the party was an abandonment of fiscal prudence, which his MPs would never have bought had it come from the left.

Yes, ultra low borrowing costs make state borrowing sensible, even necessary. Even doubters agree that Covid makes spending essential, if we are to avoid a 1930s style Depression. But a deft hand is needed.

In the run-up to Halloween, Britain faces an unholy trinity of rising infections, a Brexit deal or no-deal, and the imminent end of the Treasury’s first furlough scheme.

Mr Sunak cannot afford to waste money but nor can he be hawkish too soon. The economic hangover from coronavirus will be a kind of long Covid; a hard climb back to normality that the IMF has called the “long ascent”.

Optimism is essential, but anxiety is fast becoming a barrier to UK recovery. Consumer confidence, which had bounced back with spending on cars and houses, is dipping again. If the government persists in stop-go policies to combat the virus, it risks damaging public confidence and creating a vicious circle in which it will end up having to provide even more business support.

Ministers need to refrain from adding to the uncertainty that the virus has injected into all our lives. When people stop listening, Mr Johnson’s ability to project a sunny future is diminished.

It’s easy to spend money. It’s far harder to spend it wisely. What is needed now are more detailed industrial and fiscal policies, with ruthless cost-benefit analysis. Rapid injections of public money are vulnerable to fraud, as the Treasury has discovered with its Covid loan scheme. They can also have a warping effect by boosting vested interests.

Choosing who to bail out is fraught with difficulty, especially if some companies later fail to repay their loans. The effectiveness of central bank policy has waned as interest rates teeter close to negative. That has left politicians even more exposed, having to nurture the magic money tree as they see fit.

Mr Sunak is alive to these hazards. Yet in terms of value for money, the government has made some odd decisions.

In July, with mass unemployment stalking the land, it raised the wages of nearly 1m public servants whose jobs were safe. The biggest rise went to teachers, some of whom refused or were advised by the union not to teach online in lockdown or even mark homework. In September, the government also reaffirmed the triple lock on pensions, an already expensive policy that could now cost the taxpayer an extra £2bn a year.

This is “eat and have your cakeism” from a prime minister who likes to keep everyone happy. But the effect is the opposite. The government gives the strong impression it is governing for the old who voted for it, not the young who must foot the bill.

The spectre of mass unemployment is back. Almost every day, another company that is a household name announces job cuts. The chancellor’s job retention scheme has so far kept jobs in suspended animation, but his replacement job support scheme is more generous to workers than employers, and more risky than the French and German equivalents.

It would be better to play safer, at least for now. The government is determined to tackle longstanding problems of poor productivity and public services, especially beyond the south.

It is doubling the research and development budget and boosting infrastructure spending.

But you can’t “level up” unless the engines of London and the South East are firing too.

Ministers must also not overlook local authorities, which play a vital role in public services but are crippled by loss of income, especially in the poorest areas.

Economics is partly a game of expectations. Right now, the public mood is one of deep anxiety, and a worry that this government is not competent to deliver on its promises.

Get a Brexit deal, consult business on restrictions, be ruthless about value for money, and Mr Johnson may not reach Winston Churchill’s new Jerusalem but he might achieve another of Churchill’s maxims: “keep buggering on”.

The writer, a former head of the Downing Street policy unit, is a Harvard senior fellow

Copyright The Financial Times Limited 2020