James Heywood is Head of Welfare and Opportunity at the Centre for Policy Studies.
The economic response to the deep recession the Coronavirus has plunged us into has so far been bold and effective. Some of Rishi Sunak’s measures, such as the schemes for furloughing and the self-employed, have been some of the most generous of any country, and they have acted to shield millions of jobs and businesses.
That was Phase One of the crisis – putting the economy into hibernation to stop the spread of the virus. Thoughts must now turn to Phase Two – the recovery. The recovery plan which Boris Johnson and his Chancellor develop over the coming months may come to define conservatism for this decade.
To inform the Government’s thinking on what should be done, we at the Centre for Policy Studies have teamed up with Sajid Javid to put together some analysis of the colossal challenges ahead and come up with a comprehensive set of ideas for tackling them. Our report, After the Virus, contains more than sixty recommendations.
We wanted to address two separate but related issues: first, getting the economy to bounce back quickly and minimise the ‘scarring’ effects of the shutdown; second, addressing those fundamental issues which have been holding our economy back for years to deliver sustained growth in the decades ahead. In other words, we think this is an opportunity not just to rebuild the old economy but to build a better one.
The principles we based our approach on are simple: balance fiscal responsibility with economic prudence, and combine a revolutionary programme of public investment with an agenda for low tax and better regulation to empower the private sector.
On the public finances, we suggest the Government should give itself the flexibility to take necessary fiscal action to support the recovery, but have a credible plan to eliminate the deficit on day-to-day spending gradually. Ministers will need to be firm and not allow expensive measures which were intended as an emergency response this year to become permanent.
The deficit could well be 15 per cent of GDP this year and debt will likely balloon to comfortably more than the size of the economy – with interest rates so low we can afford to take the hit now, but it means the Chancellor will need to be all the more vigilant to get borrowing back down and stop the debt from rising indefinitely.
The economic impact of the pandemic is likely to exacerbate the regional economic divide which the Government is so committed to addressing. Our report shows that most of the jobs which are best able to weather the storm and simply shift to working from home are in knowledge-intensive sectors clustered around London and the South East. The ‘levelling up’ agenda Sajid championed in government will be more vital than ever.
We argue that this is not just for the sake of geographical equality, it’s about the massive untapped potential in our towns and cities which have been underserved for decades when it comes to investment. Our report sets out proposals not just to spend more on infrastructure but to reform how government invests, with a strengthened National Infrastructure Commission and a revitalised agenda for devolution in England so local leaders play a major role in driving economic growth.
We are urging the Government to do bring forward as many projects as it can quickly, such as a major road improvement programme, to support the recovery with increased employment and activity as well as providing long-term benefits. But really that public investment is not about the state lifting the economy up, it’s about oiling the wheels of the private sector with better connectivity and providing the conditions for innovation and growth.
To complement that, we have to look at the other ways in which we can empower our businesses to create jobs and growth, by getting better at how we do tax and regulation. We suggest that to prevent a sustained period of high unemployment there should be substantial reductions in employers’ National Insurance bills. Companies should be able to write off more of their capital spending against their tax bills to incentivise them to make productive investments. We would like to see comprehensive pro-growth tax reform, with better incentives and changes to things like council tax and pension tax relief to make them fairer.
The planning system needs to be simpler and more flexible, partly to allow businesses to make the adjustments that might be necessary to cope with social distancing, and partly to finally start building the houses we need for our young people. And we should be an open economy, encouraging top global talent and investors to come to the UK, and pushing ahead with post-Brexit free trade agreements.
It’s our businesses, our innovators and our workers who are going to get us out of this economic crisis. If we combine the new Conservative drive for public investment and ‘levelling up’ with reforms to how we tax and how we regulate, we can empower them to do that.
There’s been talk of whether the Prime Minister is a ‘Brexity Hezza’, as he apparently referred to himself, with his commitment to level up and reinvigorate left-behind places, or whether he’s a liberalising free market Thatcherite at heart. Our report sets out how he can be the best of both.