Will UK wave of state aid recede as coronavirus threat fades?

Had you asked any politician or policymaker as little as four months ago, none would have predicted the current governments interventions, which are unlike anything else seen in peacetime.

Yet around the world, public money is subsidising the salaries of millions of employees, guaranteeing billions in loans to businesses that may not survive, and being pumped by the trillions from central banks into financial markets to stop them gumming up.

These were all introduced as emergency measures. “The broad economic support packages in many countries were based on the idea that this was a temporary shutdown and we want to reverse it in a few months’ time”, says Gemma Tetlow, chief economist at the UK-based Institute for Government think-tank.

“We saw very unusual policies . . . all predicated on the fact that we shut down the economy temporarily and want to be able to reheat it,” she says. “So governments may have approached it — and may still be thinking about it — as temporary policies designed for this very unusual situation where they forced companies not to operate.”

But Ms Tetlow warns that “the question arises whether that’s what is going to happen after the crisis. The longer the shutdown goes on, the more likely it is that some of the businesses that were there in February are no longer viable.”

We will be riding this thing where there is huge pressure on the state to maintain incomes and attachment to work — that will not go away

Gavin Kelly, chair of the UK-based Resolution Foundation think-tank and a former Downing Street adviser, says “it seems very, very unlikely that we will find a magic bullet” to end the coronavirus threat. “So we will be riding this thing where there is huge pressure on the state to maintain incomes and attachment to work — that will not go away.”

There will be an increasing demand for the state to be more involved in supporting businesses and workers to help them adjust to an economy restructured by the pandemic, he adds.

That restructuring will make governments want to adapt their policies, Ms Tetlow suggests. “If we don’t want to go back to cinemas or fly in aeroplanes the way we did before, the new question is whether there is a role for government in facilitating those changes as well and ensuring that crisis-era policies do not prevent that from happening.” She points out that, in the UK, wage subsidies for furloughed workers require them to stay with their previous employer.

The prospect of the post-coronavirus economy looking very different from what went before presents a challenge for governments. Circumstances may require heavy state involvement to help the economy adapt, and leave governments with fewer resources to do so, because productivity is lower and some economic activities are no longer viable.

In the UK, independent economists surveyed by the Treasury foresee a protracted recovery. This would still leave the economy 4 per cent below the pre-Covid trend by 2024, in contrast with more optimistic official forecasts of a V-shaped recovery.

A failure to recover fully would raise the risk of new instabilities. The European Central Bank has warned that massive public sector deficits could “reactivate” the mutually reinforcing downward pull of government and bank creditworthiness last seen in the eurozone debt crisis following the 2008 financial collapse.

In the UK, Mr Kelly predicts that a large number of highly leveraged companies may be in “a very difficult position”.

If many businesses turn out to be unviable, says Ms Tetlow, the UK’s salary subsidies may have delayed unemployment rather than avoided it.

Politicians alarmed by greater state involvement in the economy, she adds, could try to justify a return to a more traditional role with the “narrative” that government help given to business through the crisis was always temporary and was no longer necessary.

But the potential for further shocks to the economy in the aftermath of coronavirus is a reason to think the state’s role could undergo another big expansion.

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“The government has shown it can move quickly towards a very big shift in how the British state is doing things,” says Mr Kelly. “We wouldn’t have thought before that the Treasury could come up with a large wage insurance scheme affecting over a third of the job market and deliver it in real time.”

He thinks no one can no one can rule out such large shifts happening again. Not as a result of a “Beveridgean plan going over several years” (a reference to William Beveridge’s 1942 report, which set the agenda for Britain’s postwar welfare state) but “in reaction to a threat . . . with something [politicians] think is temporary. The prime reason will be to avoid a major economic hit.”

“I find it hard to think of a reason to end up with a smaller state than before coronavirus,” says Ms Tetlow. She believes that people may have a greater appreciation for building resilience into public services, and perhaps make stronger demands for good quality social care. At the same time, she questions whether citizens want a bigger government enough to pay for it.

Ideology need not be an obstacle, Mr Kelly argues. “Pragmatism has made conservatives into radicals.”