This has been an exceptional year. Last week’s spending review showed how extraordinary it was for the UK. As noted by Chancellor Rishi Sunat, the Office of Budget Responsibility (OBR), “predicts that the economy is going to contract this year by 11.3 percent, the largest drop in production at more than 300. years”. What the government says and does in times like these shows us a lot about its character and capabilities, as well as the options facing the country.
Regarding its character, the revealing decision was to cut the aid budget by 0.2 percent of gross domestic product (GDP). Being just over 1 percent of net public debt this year and 0.4 percent of spending, the money saved is irrelevant. The decision violated an overt commitment. Above all, according to the World Bank “it is estimated that the covid-19 pandemic will push between 88 to 115 million more people into extreme poverty this year.” So this is a telling argument of ostentatious pettiness.
Equally revealing are the costs of the Brexi. The OBR says productivity will be 4 percent lower in the long run than it would be if the UK remained in the European Union. The Bank of England argues that disruption in the short term will cut GDP by around 1 percent in the first quarter of 2021. A Brexi Without an agreement, it can, according to the OBR, reduce GDP by 2 percent more in 2021. In the long term, it estimates, GDP may be 2 percent lower than with a trade pact. I pity companies that have to make plans amidst this kind of uncertainty about the Brexi and the pandemic.
And what about the capacity? The pandemic is a global disaster, but where does the UK rank relative to its peers in the group of leading G7 economies (plus Spain)? According to consensus forecasts, this year it will have the largest fiscal deficit, with 18.4 percent of GDP; the second largest drop, of 11 percent (behind Spain), and the third highest mortality rate, behind Spain and Italy. Many things have gone very wrong.
Lastly, what about future options? On this, the OBR is sober, it offers an optimistic scenario in which production returns to the pre-crisis GDP level at the end of next year, a central scenario in which the economy recovers to its pre-virus levels at the end 2022, a pessimistic scenario in which it returns to pre-pandemic levels until 2024. In the optimistic scenario, production returns to its pre-virus trajectory, but production remains permanently below the pre-covid trajectory in the other two scenarios , by 3 and 6 percentage points, each. All three scenarios assume a smooth transition to a free trade agreement with the European Union in January. Otherwise, the results will be even worse.
So the UK is likely to take a second permanent hit to its output and income in less than 15 years, but the scale of the hit is not certain. It depends on how well the virus is managed and, above all, on the success of the vaccination program. It also depends on other policies (including the outcome of the Brexi) that determine the magnitude of the long-term blow.
The OBR examines many strong reasons to fear injury: lower investment, destruction of company-specific capital and knowledge, loss of human skills as a result of unemployment and restructuring, early retirement, and loss of working hours as a result of greater future caution about diseases. Hopefully this year’s extraordinary fiscal support will reduce those wounds, but some of them seem certain.
The policy most likely to increase the long-term wounds and thus push the economy into one of the OBR’s bad scenarios is to let the economy languish under weak demand. After the pandemic, many special programs will end, but tightening fiscal policy too quickly will be a big mistake, especially when monetary policy can hardly be further relaxed and long-term government borrowing costs are so low.
The old fiscal rules, in particular the fixation on the deficit and the ratio of public debt to GDP, were a mistake. Now they are quite grotesque. Instead, governments should focus on their long-term balance sheets, the maturity of their debt, their borrowing costs, the relationship between these costs and the return on investments, and the strength of demand. As long as they have their own currency and a competent central bank, these things alone matter.
Over time it will become clear how great the long-term fiscal costs of the pandemic will be and whether interest rates will remain this low. So, fiscal consolidation may be necessary. To prepare, the government must consider the best way to raise taxes and, if necessary, cut spending. You must also be aware of the long-term costs of an aging population, but at this point you must focus on supporting a strong recovery. A government is not a private home; you must stop thinking as if it were.
Starts “significant week”
Britain and the European Union enter a “very significant” week, British Foreign Minister Dominic Raab said yesterday, as talks on a trade deal reach their final days with serious differences, such as competition policy and the distribution of fishing rights. “We have to get a deal in the next week or maybe a couple more days,” Raab told Times Radio.
Agreement “still possible”
The head of the British negotiating team, David Frost, said that “it is still possible” to reach an agreement posbrexit with the European Union despite the short time and the differences that persist in key points. “It is late, but an agreement is still possible,” he wrote on Twitter, stating that it is necessary to “respect the sovereignty of the United Kingdom.”
Europe ready alliance with the US
The European Union seeks to forge a new alliance with the United States to bury the tensions of the Trump era and meet the challenges posed by China. The initiative proposes to rebuild ties on common fronts ranging from digital regulation to tackling the pandemic. Financial Times. The proposal will be submitted to national leaders for approval at a meeting on December 10-11.
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