Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Policy and the pandemic

Covid-19 might be a new challenge, but many of the policy questions that have emerged in its wake are not. As the UK shapes its recovery amid the changes brought about by Brexit, the enduring challenges posed by inequality, devolution and competition loom.

Newsletter from 12 February 2021

This week Economics Observatory writers looked to the future. With vaccination efforts running well across the home nations (chart below), the post-pandemic era is on the horizon. Add Brexit into the mix and 2021 looks set to be a turning point for the UK economy.

Yet the themes we covered this week remind us that some policy questions are perennial. Trade and competition, support for industry, inequality, the questionable dominance of Westminster—all were prominent topics in the 1970s. But it is time to look again at old questions. A whole swathe of policy changes will be up for debate over the next few years. There is a huge premium on getting them right.

Share of the population receiving the 1st dose of the Covid vaccine, by nation of the UK

Source: UK Government

Worried watchdogs

Around the world competition is in a state of flux, as an in-depth article by Chris Pike and Tommaso Valletti explains. Competitive markets tend to be good ones: shops’ wares are keenly priced, firms race to innovate, and quality is driven up. For firms’ shareholders rivalry is tough—profits tend to be eroded, dividends fall—but for customers it is great.

But over the past 30 years competition has been waning, the authors say. One sign of this is how profits in the US have risen and risen, with similar patterns in the EU and UK. Mark-ups – the extra price that firms add to goods before selling—have seen a parallel rise. Here, shareholders sit back and smile, while consumers pay the price.

Brexit brings risks and opportunities. Trade matters to those who care about competition, since imports provide a check on local market power. In general, the better a country’s sources of foreign goods, the less likely it is that home-grown firms will become too powerful (and be able to over-charge customers). Indeed, recent research by Observatory Lead Editor Tim Besley has shown that trade has been better at tamping down profits and mark-ups than antitrust watchdogs themselves. The concern is that if Brexit makes trade more costly then this important correcting force could get weaker.

Another risk is anti-competitive behaviour by governments themselves. The EU’s “State Aid” policies guide how much governments (i.e. states) can favour (i.e. aid) domestic companies. Traditionally industries like shipping, aerospace and railways have received favourable loans or contracts from governments keen to create “national champions”. The UK has done relatively little of this. It would be possible for it to quadruple its state aid spending, and still being doing less than Germany (see chart).

State aid (% of GDP)

Source: EU, 2019 (data for 2018)

Chris and Tomasso suggest a clear course. On state aid, they emphasise the need for an independent regulator to make sure any new spending is both targeted and value for money (this has not always been the case in the UK). They also ask whether antitrust bodies may become tougher, blocking more mergers. It is a fascinating article and an area to watch. Perhaps 2021 will be a line in the sand, with tougher watchdogs emerging to make the clubby and cosy brand of capitalism creeping across the world rarer in the UK.

Safety nets, tested

Competition also matters because high consumer prices affect the poorest in society most. I have seen this play out in person in Santiago. Chile is the OECD’s most unequal country. It also has a bad record on competition. Lacking rivals, local firms set sky-high prices for everything from chicken to eye-glasses, from textbooks to medicines. This makes inequality even tougher and explains why the country’s capital has seen widespread rioting in recent years.

Covid-19 has its own type of inequality, hitting some harder than others. Mike Brewer and Karl Handscomb provided an updated analysis of the impact of the pandemic on income inequality in the UK. Looking at the economy as a whole, the loss of income may be between 4% and 8%, the authors report. But this average masks big differences.

A worker in the middle—the median—had almost unchanged income. This, Mike and Karl explain, is because the furlough schemes have worked relatively well. Those with income above the median tended to lose more, while those lower down the earnings scale were made better off as emergency benefit payments kicked in.

But others slipped through the safety net. Around 3.8 million workers are thought to have missed out on job-retention and support schemes. New starters in firms, and those working freelance or on short-term contracts, have often been ineligible for support. Overall, the evidence shows the safety net is doing broadly what it should, but that there are still some holes to fall through. Looking further ahead surely things can be improved.

Devolution on trial

A longstanding question set to rise up again in 2021 concerns devolution. A data rich article by Stuart McIntyre and Graeme Roy asked how devolved governments have fared. They start with the observation that health is an area with truly devolved power. In contrast with, say, military procurement or monetary policy (set in London), lawmakers in Edinburgh, Cardiff and Belfast make key decisions on national health policy. Other Covid-19 policy tools, including bans on social gatherings and decisions on school opening dates, are also taken locally.

The independent governments have acted independently. Focusing on Scotland, the authors draw out key differences which include the early plan (or route map) for the crisis, guidance and rules given to firms, and the timing of lockdowns. Some of the differences seem important: Scotland and Wales tended to lockdown earlier and lift rules later than England. But some of it, Graeme and Stuart note, seems a bit arbitrary. Scotland had five ‘levels’, England three ‘tiers’, while Wales used traffic lights and Northern Ireland favoured a ‘one size fits all’ approach. What difference did all this make?

To get the full answer I heartily recommend the fact packed piece. Two things spring out for me. First, despite all the political bluster, the differences in pandemic experience seem small. The most striking patterns of Covid-19—the humps and troughs of cases, the rate at which people have been dying—are broadly the same across the four nations.

Cumulative death rate, by nation of the UK (within 28 days of a positive test)

Source: UK Government

Yet my second takeaway is a prediction: analyses like this will be the first of many in this area because there are differences by country, and they are somewhat unexpected. Having put together more UK charts than I care to remember, I expect a familiar pattern. Pick any measure and first and second place, pretty much always, will go to England and Scotland. The two nations are close comparators when it comes to employment, or GDP, or income levels (see chart).

Employment rate and GVA (per head), by nations of the UK

Source: ONS

The laggards are sadly familiar. Rugby-related statistics put aside, Wales and Northern Ireland sit at the bottom of the pack. Yet this is not the case with Covid-19. Wales and Northern Ireland are not at the bottom, and many of Stuart and Graeme’s charts show they are doing better (see chart).

Number of PAYE employees, by nation of the UK

Source: ONS, HMRC

This is a puzzle. As with competition, trade and inequality, there are big questions left to answer when it comes to devolution.

Richard Davies
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