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Economic difficulties: bad luck, or bad judgment?

Author: David Smith

Published: 14 Oct 2021

Writing for the Financial Services Faculty, David Smith, Economics Editor of the Sunday Times explores this question and considers it could be neither, but a consequence of the other.

When, early in 2008, the government was worried about the storm clouds gathering over the economy as a result of the freezing of wholesale markets, the Treasury put out a paper emphasising the resilience of the UK economy to shocks. The paper was intended to reassure but it also reflected a sense of official disbelief.

How could an economy which had grown non-stop for 16 years be on the brink of a recession? More importantly, how could Gordon Brown, who had been chancellor for 10 of those 16 years, suddenly find himself, within a few months of taking over as prime minister, presiding over a severe downturn? He, after all, had promised that there would be “no return to boom and bust”.

There was a bust, and Brown is more associated with that bust than the years of stability before. He felt himself to be ill-used by events, a victim of bad luck. So did Donald Trump. So convinced was he that the bad luck of the pandemic resulted in him being a one-term president (for now at least), that he has refused to concede that he actually lost in November 2020.

The pandemic offers an interesting case study. While the recession of 2008-9 propelled David Cameron into office in 2010, suggesting that Brown’s Labour government carried some of the blame, the deeper recession of 2020-21 probably would not have dislodged Boris Johnson’s government, had an election been required in, say, the summer of 2021. In America, Trump may need to look for other explanations for his defeat.

It is a rule of thumb for politicians to claim that the nasty things that happen are global in nature, while the good things are locally generated by the government. It will be a challenge for future prime ministers to find somebody to blame now that the UK has left the EU. Bashing Brussels will probably continue for a while yet.

The pandemic was indeed a global shock. Though plenty of mistakes were made, the public was prepared to give many governments the benefit of the doubt, particularly those that responded most dramatically with fiscal support. The UK’s response was one of the biggest, making Rishi Sunak something of a national hero.

Towards the end of last year, the chancellor told the House of Commons that: “Our health emergency is not yet over. And our economic emergency has only just begun.” At the time I thought it was unnecessarily downbeat. The economy’s big downturn in response to the pandemic had occurred some months earlier and the prospect was for a strong recovery in 2021. Sunak’s subsequent messages became a lot more upbeat.

From the perspective of autumn 2021, however, the chancellor’s warnings look rather perceptive. The government softened the pain of the recession but has been struggling to ease the strains of the recovery. The playbook is a familiar one; that these strains are being experienced in many countries across the world and are global in nature. It is, however, a more difficult sell.

Consider Sunak’s great pandemic innovation, the furlough scheme or, to give it its full title, the coronavirus job retention scheme. It succeeded in its main aim, which was to prevent a wave of redundancies when the economy was first locked down more than 18 months ago. But, with a bill for taxpayers of some £70 billion, it may have succeeded a bit too well. The end of the furlough scheme was not meant to coincide with widespread labour shortages.

Some of those shortages are due to Brexit, but some are explained by others dropping out of the labour market. It may have been that some workers found life on furlough rather agreeable, while others saw the pandemic as an opportunity to reassess their priorities.

Sharply rising energy prices, with wholesale gas up by 300 per cent at one point, were not part of the plan either. The petrol panic may have come and gone but consumers are jumpy. And, as previous governments have discovered, when the bills start coming in, people tend to blame the government. A government that lacks an effective energy strategy has no real defence from criticisms from households facing higher energy bills. Supply shortages and higher taxes, which are on the way next spring, fit the chancellor’s description that for many people the economic emergency is just beginning.

This is not merely a question of a government’s popularity, and whether voters will have forgotten about this period by the time of the next general election. It has real-world consequences. The Bank of England, spooked by high wage and price inflation, has gradually moved on from its previous position, which was that the rise in inflation was purely transitory. Interest rates may rise sooner rather than later.

More generally, to return to where this piece started, governments and businesses need to demonstrate greater resilience. It was no surprise that a pandemic and the resulting restrictions knocked the economy way off course in 2020. A supply shock was, however, the widely predicted consequence of the emergence from the pandemic, and little was done to prepare for it. Bad luck can be a consequence of bad judgment.