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Back to normal?

Rishi Sunak has made a series of changes to his cabinet and re-organised several key government departments. In the face of numerous policy challenges – including sky-high inflation, a struggling NHS, and conflict in Ukraine – it is unclear exactly what these administrative changes will bring.

Newsletter from 10 February 2023

Earlier this week, UK prime minister Rishi Sunak announced a cabinet reshuffle. This included another Whitehall reorganisation: breaking up the Department for Business, Energy and Industrial Strategy (BEIS); shrinking the Department for Digital, Culture, Media and Sport (DCMS); and dissolving the Department for International Trade (DIT).

BEIS and the DIT have merged to form the new Department for Business and Trade, with the energy and climate policy areas (the ‘E’ in BEIS) forming the basis for the new Department for Energy Security and Net Zero. The science-oriented responsibilities of BEIS have been combined with the ‘digital’ part of DCMS, forming the new Department for Science, Innovation and Technology.

What does all this mean for the government’s economic policy agenda? Immediate challenges include high inflation (and the cost of living crisis), widespread industrial action, and the conflict in Ukraine. During his visit to Downing Street and Westminster Hall on Wednesday, President Volodymyr Zelensky’s message was clear: send British fighter jets now. Whether assent fits with Sunak’s plans for public spending (and indeed foreign policy) is uncertain.

There are also big longer-term challenges. The prime minister, a staunch supporter of leaving the European Union, is under pressure to demonstrate tangible benefits. Recent evidence suggests that Brexit has weakened UK trade, lowered investment and helped drive up food prices. The long-run effects of Covid-19 have left the NHS struggling to cope with a huge backlog, with waiting lists unlikely to fall before 2024. And the country’s longstanding problem of weak productivity growth means that it will be tough to get out of a recession.

So, how might the departmental rejig help? The dismantling of BEIS says little about Sunak’s plans for reforming the health service, solving public sector pay disputes, curbing inflation or bolstering growth. Whether the reshuffle triggers a new wave of effective policies or ends up a simple act of deckchair rearrangement remains to be seen.

Three hundred years of history

This week on the Economics Observatory, we began by looking backwards. To gain a better understanding of how the UK might respond to today’s economic challenges, it is often useful to draw on lessons from history. History, after all, is not the past, but is a map of the past, useful for the modern traveller.

On Monday, we posted an article by Stephen Broadberry (Nuffield College, University of Oxford), Jagjit Chadha (NIESR, and one of our lead editors), Jason Lennard (London School of Economics) and Ryland Thomas (Bank of England). They examined evidence from three centuries of peaks and troughs in UK economic activity. They show that while the frequency of recessions has declined to a historical low, the duration and amplitude of downturns have not.

With particular relevance to today, the study reminds us that pandemics, wars and commodity price rises have all been important drivers of recessions in the past. But whatever the underlying cause, the average recession between 1700 and 2010 has been tick-shaped, with a short contraction and a slightly longer recovery. Figure 1 shows that in the first year of a contraction, GDP falls, on average, by 2.5%. In the second year, growth returns but the level of economic activity remains below the peak. The average recovery is complete in the third year as the pre-recession peak is surpassed.

Figure 1: The shape of recessions 1700-2010

Source: Broadberry et al, 2023
Note: The blue line is the historical average and the shaded area represents the 95% confidence interval calculated using the standard error of the mean recession at each point. The standard deviation of the sample is almost eight times larger than the standard error, given a sample size of 59 recessions.

Using historical data, the authors then make a prediction about the recession currently looming over the UK. They argue that the 2022/23 recession will look similar in scale to the recession of the early 1990s over the first two years, but could then resemble the protracted recoveries from the Great Depression of the 1930s and the global financial crisis of 2007-09.

This suggests that things are unlikely to return to ‘normal’. Since the global financial crisis , the UK has experienced a change in business cycle behaviour as radical as that from the 18th to the 19th century, and again after the post-war period. Whatever the trajectory of recovery over the coming months, the economy won’t ever again look like it did pre-financial crisis, pre-Brexit and pre-Ukraine.

Struggling on

Against this backdrop of economic fragility is a sickly NHS. Waiting lists are at historic highs, patients are being treated in corridors or in the back of ambulances, and nurses were on strike this week demanding better pay. But why has the situation got this dire? On Wednesday, we posted a piece by Max Warner (Institute for Fiscal Studies) addressing this question.

Max proposes that several factors are likely to be driving the NHS’s poor performance, including the continued presence of Covid-19 patients in hospitals, problems discharging patients, and changes in their average sickness. But in his article, which focuses on England and Wales, he warns against jumping to conclusions, highlighting that the relative importance of these different factors remains unknown, due to the complexity of a system as large as the NHS.

Looking at resourcing, for example, Max finds that the NHS actually has more to work with than it had pre-pandemic. For example, total funding in 2022/23 is 11% higher in real terms than in 2019/20. There are 9% more senior doctors and 8% more nurses and health visitors than in 2019. And in the third quarter of 2022, the NHS had 129,000 available hospital beds (1% more than at the same point in 2019).

But we need to look closer. The lingering effects of the pandemic cannot be ignored. Max notes that in 2022, there was an average of 9,200 patients with Covid-19 in hospitals in England each day. After adjusting the number of hospital beds for these patients, the NHS has between 1% and 5% fewer beds than it had before virus arrived.

Max also suggests some additional factors. Management problems, poor staff morale, and changes in the staff mix could all be driving down NHS performance. These issues, plus the longer-term challenges of the pandemic, interact with and exacerbate each other. Unfortunately, this makes it very hard for policy-makers to identify simple and effective solutions.

Not going out

This week on the Observatory, we also posted an article that I wrote. Earlier this month, the Office for National Statistics (ONS) released new data on the state of the UK’s night-time economy. I wanted to find out how exactly the cost of living crisis was affecting pubs, clubs and restaurants, especially after these businesses endured such a tough time during the pandemic.

As an initial caveat, it is worth noting that the night-time economy is not made up just of social venues. Plenty of night-time workers have jobs in healthcare (like nurses and doctors on late shifts), retail (working late in supermarkets and warehouses) and manufacturing (those on the factory floor working deep into the evening or starting well before dawn).

With this in mind, I focused on what the ONS call night-time ‘cultural and leisure activities’. This means bar-staff, waiters, bouncers, chefs, stage actors, musicians, and taxi drivers (in short, everyone you might see during an evening or night out). I chose to look at this group because it has a higher proportion of night-time workers who work only during the evening and/or the night (see Figure 2). This made it a useful sub-sector for reviewing how the UK’s late-night economy is coping.

Figure 2: Breakdown of night-time workers by industry grouping, 2022

Source: ONS

Having endured periods of lockdown and capacity limitation during Covid-19, many businesses in the night-time economy now face a new period of uncertainty. Inflation is currently at almost 10%, causing many people to cut back on luxury/non-essential spending (such as streaming subscriptions or going out). Many families are choosing between ‘heating or eating’. Enjoying a meal at the pub or going to a concert may no longer be a priority, and this is bad news for those trying to make a living from evening crowds. 

Beyond lower demand, energy price inflation is having a particularly big impact on the night-time economy. UK fuel prices rose by 11.5% in the year to December 2022, hitting venues like pubs and restaurants hard. Further, mounting electricity/gas costs mean the average pub is expecting its energy costs to rise by 82% once the government’s business support scheme ends in April 2023 (BBPA, 2022).

To take a local example, the owners of the Bianchis Group – which comprises several of Bristol’s favourite venues – made a plea this week for their customers to understand the urgent need to raise prices. One of the group’s restaurants has seen its energy bills increase threefold: from £1,500 per month to £4,500. They also warn that the costs of their raw ingredients (such as grain and vegetable oil) have risen drastically.

There are also ‘hidden’ economic costs to consider. These venues contribute to what economists sometimes call ‘cultural capital’ – they are part of the fabric of society and are often places where people develop formative relationships within their communities. Whether it’s a local pub or an award-winning restaurant, a sparkling theatre stage or a sweaty basement night-club, these places matter. They make a place worth living in and generate value that far exceeds what’s in the till at the end of the night.

The UK has long taken great pride in its creative industries. As the government’s energy support scheme for businesses approaches its end date, it is essential that policy-makers consider this vital sector. Many cherished places closed forever because of the pandemic. It would be a terrible shame if too many more go the same way as inflation continues to bite.

Seeing a renewed focus on science within central government is welcome. Cutting-edge research is a critical driver for innovation and productivity growth. In theory, this should make us all richer and improve the nation’s quality of life. But to overlook pubs, bars, restaurants and the night-time economy more broadly, and to fail to see the support they urgently need, would be to risk knowing the price of everything and the value of nothing.

Author: Charlie Meyrick
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