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Road to recovery

While the immediate public health impact of Covid-19 seems to be easing in the UK, the likely long-term economic scars cannot be ignored. Policies targeting the most vulnerable – as well as investment in technology to improve productivity – are key to a sustainable recovery.

Newsletter from 30 July 2021

This week, daily Covid-19 cases in the UK fell to a three-week record low, alleviating fears of a renewed surge following the easing of restrictions on 19 July. While the immediate effects of Covid-19 on public health appear to be subsiding, long-term economic scars remain.

For example, on Sunday, the Public Accounts Committee released a report declaring that government debt would take decades to recover from the crisis and estimating that Covid-19 measures have already cost £372 billion. This has taken a toll on national debt, as last week’s release of public sector finance data from the Office for National Statistics showed. In June, national debt hit £2.2 trillion, or 99.7% of GDP – a share of national income not seen since the early 1960s.

As well as the mounting costs to the Treasury, the effects of the pandemic have not been felt equally across the country. At the Economics Observatory, we have explored the effect of Covid-19 on different kinds of inequality.

An unequal crisis

Earlier this year, Mike Brewer and Karl Handscomb (Resolution Foundation) discussed how, at least initially, Covid-19 reduced the income gap between rich and poor, with the average low-income household better off financially than they were before the crisis (due to furlough and other government support measures). But as Mike and Karl note, the ending of the Coronavirus Job Retention Scheme in September is likely to reverse this trend.

Similarly, Helen Hughson (London School of Economics, LSE) concludes in an Observatory article posted back in the spring that while wealth inequality may have fallen in March 2020, when coronavirus caused stocks to plummet, it is now likely to be just as wide as before the crisis.

Covid-19 has also led to intergenerational inequalities. Mike and Karl show that while the elderly have suffered the most severe health consequences from the crisis, they have been largely insulated from the economic effects of Covid-19, as they receive most of their income from the government in social security. And due to school closures, children have been particularly badly affected, in terms of mental health, learning losses and food insecurity.

Meanwhile, Lucinda Platt (LSE) discussed how ethnic minorities are suffering as a result of the pandemic – in terms of both their higher mortality risks and the worse economic outcomes for some groups. And Eugenio Proto (University of Glasgow) and Climent Quintana-Domeque (University of Exeter) have revealed the disproportionate damage of Covid-19 to the physical and mental health of black, Asian and minority ethnic people in the UK, exacerbating existing inequalities.

Many longstanding gender inequalities have also worsened over the pandemic, as Sarah Smith (University of Bristol and one of the Economics Observatory’s lead editors) has explored. Since the crisis began, women have experienced worse declines in their mental health than men, and they have taken on the lion’s share of home schooling and increased housework, with mothers experiencing a larger fall in working hours than fathers.

Finally, some regions have found it harder to recover from Covid-19 than others, on measures such as consumer spending and productivity.

Closing the gap

Policies to address these inequalities are crucial. This week on the Observatory, Stefanie Stantcheva (Harvard University) argues that a range of policy actions is needed – across the income distribution and at all stages of the economic process. Such multidimensional packages are daunting, so Stefanie proposes thinking about policy interventions with a three-by-three matrix (see Table 1).

On one side are the income groups mainly targeted by a policy: the bottom of the income distribution, the middle classes, and the very top.

On the other side are the three stages at which interventions can take place: pre-production policies, which shape the endowments that people bring to the labour market, and their opportunities; production policies, which influence firms’ decisions and how the labour market functions; and post-production policies, which are redistributive measures, such as government transfers and progressive taxation.

Table 1: Policy matrix, economic stage of policy intervention and income segment

Pre-Production stageProduction stagePost-Production stage
Bottom incomesPrimary education & early-childhood programmes; vocational trainingMinimum wage; apprenticeships; reduced social security contributions by firms; in-work benefitsSocial transfers (housing, family child benefits); guaranteed minimum income
Middle incomesPublic higher education; adult retraining programmesCluster policies; SME support programmes; EU Structural and Investment Funds; occupational licensing; on-the-job training; collective bargaining & work councils; EU trade policiesUnemployment insurance; pensions
Top incomesInheritance & estate taxesR&D tax credits; EU competition policiesTop income tax rates; wealth taxes

Stefanie notes that production stage policies are not systematically geared towards reducing inequality and creating better jobs. Instead, this stage of intervention targets market competition, physical investment and innovation.

This suggests that to help all parts of the economy recover from the pandemic, policy-makers cannot rely exclusively on ‘social policies’ focused on inequality, but should also make a priority of economic policies to improve productivity.

An innovative recovery

On Monday we posted an article by Christoph Görtz (University of Birmingham) exploring the important role that productivity could play in the UK’s recovery. Recent research shows that new technology can affect the economy before it is even available to use, as its announcement gives rise to expectations of higher future wealth and better quality of life, which increases spending. These so-called ‘news shocks’ account for an estimated 50% of the fluctuations in GDP.

To explain the intuition behind this, Christoph uses the analogy of indulging in a nice meal out to celebrate news of a big pay rise, even though the money hasn’t been received yet. While the idea itself is persuasive, actually measuring the effect of productivity news shocks is tough, and results have been inconclusive.

But measurement challenges aside, in Christoph’s most recent study, he argues that news about future technological advances consistently triggers a strong boom in the economy. This may bode well for the UK following last week’s government announcement of its Innovation Strategy, setting out its ambitions for an innovation-led economy. According to Christoph’s findings, this release alone could give the economy a much-needed boost.

Observatory News

Author: Kate Lucas
Photo by Johannes Plenio from Pexels
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