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With a Torrent of Money, Britain Takes Aim at Coronavirus and Austerity | Press "Enter" to skip to content

With a Torrent of Money, Britain Takes Aim at Coronavirus and Austerity

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LONDON — In one action-packed day, the people who oversee money in Britain sought Wednesday to ease a pair of economic crises — the immediate emergency of the coronavirus outbreak, and the long, entrenched decline assailing national life through budget austerity.

It appears that Britain has entered a new era. Four decades after Margaret Thatcher and her Conservative Party assaulted the traditional social welfare state, and following the slow bleed of government services in more recent years, a Conservative prime minister, Boris Johnson, was embracing public money as the pathway to improved fortunes.

In place of stern homilies about the need for Britain to live within its means, Mr. Johnson and his party had effectively placed their faith in the teachings of Britain’s most celebrated economist, John Maynard Keynes, who looked to government to spur the economy in times of trouble.

“It’s certainly an ideological change compared to what they previously believed,” said Andrew Goodwin, chief United Kingdom economist for Oxford Economics in London. “The Conservatives have traditionally been a small-state, low-borrowing party. This is very much a departure from what they have preached before.”

The first salvo came before breakfast, as the Bank of England delivered an emergency reduction to short-term interest rates while detailing plans to help troubled companies with credit. The central bank was seeking to spur borrowing, investing and other activities that keep businesses moving and people employed as fears of the coronavirus outbreak intensify.

That move, more symbolic than substantive, followed similar action from the U.S. Federal Reserve last week. The central bankers are pulling what levers they possess, even as those tools are probably incapable of producing meaningful change. When people are scrapping business trips and avoiding restaurants for fear of contracting a dangerous virus, making borrowing a tad cheaper is unlikely to provoke spending.

But just after lunchtime in London on Wednesday came the second stage of the offensive. The man in charge of the Treasury, Rishi Sunak, stepped to the lectern inside Parliament and, over the course of an hour, detailed plans to set loose vast amounts of money toward repairing the accumulated damage of a dozen years of extraordinary budget-cutting.

Highways would be built, rail lines upgraded and expanded, university research centers bolstered. Police departments, which have been decimated by austerity, would gain funds. The National Health Service, Britain’s cradle-to-grave socialized medical care system — and a locus of complaints about the ravages of budget-cutting — would gain a substantial infusion of money.

At the same time, Mr. Sunak declared that the government was earmarking 30 billion pounds (about $38.7 billion) to help businesses and workers menaced by the coronavirus.

Taken as a whole, the Bank of England and the Johnson administration effectively signaled that Britain would not hold back in confronting the dangers of the outbreak. That action stood in marked contrast to the United States, whose population is nearly five times the size of Britain’s, yet has so far approved only $8.3 billion in emergency spending for the coronavirus.

“What we have seen in the U.K. is a much more coordinated, much larger response than in the U.S.,” Mr. Goodwin said.

Ever since the global financial crisis of 2008, the world has relied on central banks and their ultralow interest rates to stimulate economic activity. Economists have warned that this was not sustainable. Cheap credit was nurturing a dangerous dependence on easy money that could end in disaster. Fiscal policy was necessary, the experts said.

Britain just heeded that call. The budget increases spending on public investment like infrastructure from a current annual pace of 2.4 percent of Britain’s total economy to 2.9 percent over the next four years, according to Oxford Economics. That should lift overall economic growth by about 1 percent over that time frame.

“Genuinely striking is the substantial increase in planned capital spending,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent research institution in London. “The key risk is that once again growth disappoints, and that this leaves the chancellor with the choice of whether to rein back again on spending, or to announce further tax rises, or to abandon his fiscal targets and to allow debt to rise further.”

While the government’s spending plans presented a revolution in rhetoric and emphasis, they fell short of truly ending the era of austerity. The budget leans heavily on infrastructure spending, health care and education, but does not restore cuts to a range of welfare programs, such as cash grants for poor households. It does not replenish funds for local governments, many of which have had their own budgets cut by more than 60 percent over the last 12 years.

“There isn’t a total reversal of austerity,” said John Hawksworth, chief economist at PwC in London. “There is a big-picture element that looks more Keynesian, but there are lots of areas of government that are at best standing still.”

Perversely, the coronavirus outbreak appears to have supplied Mr. Johnson a useful political opportunity — a justification for aggressive spending in the face of a potentially uncomfortable budget conundrum.

The prime minister owes his office to the decisive parliamentary majority secured by his party in elections last December. The Conservatives benefited from anger among voters in struggling communities in the north of England, who have suffered the impacts of diminished government services. Many such voters have traditionally supported the Labour party, but switched to cast their ballots for the Conservatives.

Mr. Johnson’s continued dominance in British politics requires that he make their support stick. In that spirit, he and his party have talked about “leveling up,” evening out gaping regional inequalities that have made London a glittering playground for the wealthy and the rest of the country an often grim landscape of abandoned factories, shuttered pubs and crumbling public housing.

But leveling up was always going to cost money, challenging the Conservative Party’s fiscal rules aimed at limiting budget deficits. And another of Mr. Johnson’s central political promises posed a conflict with his ambitious spending plans: He took office vowing to finally deliver on Brexit, removing Britain from the ranks of the European Union.

Britain and the European bloc are now engaged in negotiating a trade deal governing their further commercial dealings. No one knows where those talks will lead, but few anticipate a pot of gold waiting at the end. Britain relies on Europe as the buyer of nearly half of its exports. Any disruption to trade will affect Britain’s economy, now stagnant and suffering some of the weakest rates of investment in the developed world. Weaker economic growth means less revenue reaching government coffers.

This was the fundamental problem facing Mr. Johnson following his election as he announced intentions to bestow money on the constituencies that had put him in power. Following through on Brexit while also delivering on his budget goals would require him to engage in activity that went against the ethos of his party: He was going to have borrow money.

The arrival of this coronavirus is a life-and-death matter. It is likely to test the capacity of the weakened health system. But for Mr. Johnson the outbreak also added the imprimatur of legitimacy to his ideological leap to unrestrained government spending. Whatever the pitfalls of a Conservative prime minister proposing a stark increase in public spending, financed by debt, the imperative for such a course was now seemingly enhanced by a bona fide public health threat.

“The coronavirus puts a veneer of reputability on it that perhaps wasn’t there before,” said Ben Clift, a professor of political economy at the University of Warwick in England.

The outbreak also provides Mr. Johnson cover, he added, as Britain’s abandonment of Europe limits economic growth and erodes living standards in much of the country.

“The coronavirus can be presented as a reasonable explanation for why the U.K. economy is not growing well,” Mr. Clift said. “You can wrap it up and say, ‘We were just hit by this unexpected shock.’”


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