The UK Fiscal Policy Response to the COVID Pandemic

The COVID pandemic has created unchartered circumstances where the world economy has not only been brought to its knees from pure market failures, but rather the decisions of policy makers to put the market at a halt. This very decision has put the financial welfare of citizens at risk as well as put many businesses in a position they did not see coming. So why is this important and what are the drawbacks we can find to unpack the decisions of key policy makers?

Most governments around the world have opted for the policy of creating stimulus packages to keep companies temporarily solvent despite economic inactivity. In the case of the UK, the Chancellor of Exchequer Rishi Sunak have offered loans in the form of the furlough scheme for many industries to keep workers “employed”. Although this would be the instinctive policy response to ensure there isn’t a volatile drop in unemployment rates, it is only a short-term solution. What has not been considered is the actual demand for these same industries since the pandemic has hit. In other words, how far has the world economy changed since the start of 2020? What businesses will survive and which ones will become redundant. To many, it is not for government to decide which businesses fall under and which survive like the events of the Financial crisis where the Federal Reserve hand picked and bailed out banks they deemed “too big to fail”. However, the state of these industries has been put in such a position from the very policies that were put in place through national lockdowns.

Rather than the UK government having a robust plan to manage the UK’s response to the pandemic, they have been rather reactive than proactive in their policies. The fact that on the 15th January 2021, the Johnson cabinet finally decided to close its borders with any incoming entries requiring negative tests. This policy has evidently come late in the response to the pandemic. The UK has gone through three lockdowns on top of not having a bold response in a similar fashion to New Zealand by closing its borders early. Where this has been problematic is that such policy decisions of lockdowns should not be reactive relative to rising COVID rates. Prevention is always better than a cure and it would have been better for the UK Government to outline an extended lockdown period from the very beginning whilst closing off the UK’s borders. Instead of this, the UK’s reactive proposal of tiers and the scheme of “eat out to help out” have made no difference in the solvency of businesses, as ultimately the moment there were increases in COVID rates the UK government reverted back to imposing strict lockdowns.

Markets always find new ways of adapting to different times, new ideas and new demands. From this alone, not all industries can keep up with the ever-changing demands of markets. In this case, the entertainment industry, hospitality and travel industries have all suffered the most since the beginning of 2020. The worry is that the furlough scheme within the UK to keep unemployment (statistically) low, is only a temporary measure that only hides the deeper issues with such policy decisions. Once the pandemic is brought to a slow demise, there are no guarantees that these same industries will be able to keep hold of furloughed employees as they now face a debt that wasn’t of their original making, let alone whether there will be the same demand for their industries.

In the short run, “real” unemployment rates within the UK will stay relatively masked. However, in the long run, there is a risk that once the furlough scheme ends, the numbers will rise dramatically. The trade off between temporarily keeping unemployment statistically low or having higher “real” unemployment is a hard policy decision to make. The UK government faces a challenging time ahead to find ways of stimulating demand that ensures employers need workers to kickstart the economy again. The Johnson government faces a dilemma, whether to temporarily save industries that thrived in the world before COVID, or allow them to become insolvent unless they find ways to become more dynamic within these current times. The survival of the fittest trope has never been more relevant when it comes to contemporary industries, as those that fail to innovate and adapt to the current times will ultimately be the first to fall in a post-Covid world.