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The U.K.’s Economic Coronavirus Response: An Analysis

By: Julia Manso

In the second quarter of 2020, the United Kingdom simultaneously experienced the steepest second-quarter economic contraction of its peers and the highest Covid-19 death toll in Europe, its GDP declining by 20.4 percent for the quarter (equivalent to an annualized rate of 59.8 percent). In the same interval, the U.S. and Germany had GDP declines of roughly 10 percent, while Italy had a 12.4 percent decline, France 13.5 percent, and Spain 18.5 percent. The cause for the difference? The combination of a late and sustained lockdown and inefficient economic policy.

While the first reported case of Covid-19 in England was on January 31, the U.K. only entered lockdown on March 23, weeks after its European peers. With earlier lockdown meaning earlier reopening, other European countries like Germany were reopening early in the second quarter while the U.K. only began to gradually ease restrictions in late May. Additionally, the U.K.’s economy is more dependent on services, most of which require close contact, than most other European countries. The Organization for Economic Cooperation and Development’s (OECD) latest assessment finds the services sector, including financial services, hospitality, and tourism, comprises about three-fourths of the U.K.’s GDP. While these two factors are certainly leading contributors to the 20.4 percent contraction for the second quarter, they are not the only causes: the critiques and shortcomings of the Government’s Covid-19 economic response are much more extensive.

Like other central banks, the Bank of England steeply cut interest rates, with current levels now at 0.1 percent. Also offering banks and building societies long-term funding at interest rates of 0.1 percent, the Bank has worked to expand lending, yet beyond the Bank’s monetary policy, the Government’s fiscal policies and emergency schemes have played a key role.

While countries like the U.S., Ireland, and Canada began bolstering support for unemployment claimants early in the pandemic, the U.K.’s approach focused more on wage subsidies with the Coronavirus Jobs Retention Scheme (CJRS). Under CJRS, the Government steps in to help pay wages, paying up to 80 percent of the salary for a worker who would otherwise be made redundant. While this plan places the U.K. in a good position for the duration of the scheme and staves off higher unemployment numbers, it could potentially help impede economic recovery, essentially delaying layoffs rather than avoiding them completely for some sectors. Certainly, this is truer for sectors like arts and entertainment, which will experience a more delayed reopening, than others where the reduction in demand is largely temporary. Eager to avoid this perception of keeping certain businesses on “life-support,” the Chancellor of the Exchequer, Rishi Sunak, announced in July as part of the Summer Economic Statement that the CJRS will begin phasing away support in late August and end it completely by the end of October.

Yet, the largest complaint seems to be the lack of specialization among coronavirus support schemes and the insistence that a “one-size-fits-all” system of support is successful. The companies using CJRS funds are not necessarily the most vulnerable nor those who are seriously hampered by social distancing restrictions, and the phaseout of the plan will likely disproportionately impact the vulnerable.

A similar concern plagues the Self-Employed Income Support Scheme (SEISS), announced six days after the CJRS, which seemed to be an afterthought. The House of Commons’ Treasury Select Committee reported receiving “many evidence submissions” of the inequity between those formally employed and those self-employed, roughly five million U.K. workers. In the initial launch announcement, the Chancellor claimed that 95 percent of those who are majority self-employed would benefit from the scheme, yet an analysis by the Institute for Fiscal Studies (IFS) released shortly thereafter estimates that just 62 percent of all self-employed individuals will be covered. While the Government announced the extension of SEISS, making it clear individuals could apply for the second round of payments in mid-August, many Members of Parliament, especially those in the Labour Party, have criticized the SEISS as inflexible: like the CJRS, SEISS provides no extended support for self-employed workers in the hardest hit sectors like the music industry, which are disproportionately composed of self-employed workers.

Will the Government adapt these plans to provide sector-specific support? Sunak’s Summer Economic Statement in early July, perhaps the most holistic encapsulation of the Government’s plan, suggests not. Although not officially a budget, the Summer Statement demarcated the Government’s upcoming Covid-19 spending plans; while firm about winding down the CJRS scheme, Sunak added in a “jobs retention bonus” of £1,000 per retained worker, a measure designed to incentivize employee retention, that could cost the Treasury upwards of £9 billion if every furloughed worker is retained. Also announcing a “kickstart” scheme for young employees lasting six months, investment in Jobcentre work coaches and apprenticeships, green investment, and cuts in stamp duty, perhaps the most targeted measure of the scheme was its VAT cut for leisure and hospitality of 20 percent to 5 percent for the next six months and the “eat out help out” plan, where meals eaten at participating businesses Monday to Wednesday in August will be 50 percent off with a maximum discount of £10 per person.

Critics of the Chancellor were quick to share headlines like “Promised a New Deal. Got a meal deal” and “Grab a £10 Rishi Dishi,” and on the whole, as The Economist summarizes, “commentators were underwhelmed.” Despite entailing £30 billion of investment, the Government’s plan does little to alleviate those sectors and individuals hardest hit by Covid-19. Come October and the end of both CJRS and SEISS, the U.K. will likely experience a reckoning, revealing the true long-term extent of the virus’ impact on the economy. With its service-oriented economy and flares of Covid-19 prompting a return to lockdown in cities like Leicester, the much hoped for V-shaped recovery becomes more elusive by the day. Will the massive Government expenditures like CJRS aimed at keeping workers on the payroll “pay off”? How, if at all, will the impending Brexit negotiations complicate the U.K.’s recovery? And were these planned rescue packages enough? Only time will tell.


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