In conversation with Philip Hammond. How will the economy recover from Covid-19?

In conversation with Philip Hammond. How will the economy recover from Covid-19?

09.04.20

James Harding, Co-founder and Editor, Tortoise Media, in conversation with Philip Hammond, former Chancellor of the Exchequer.

On the day that 938 new UK hospital deaths from C-19 were disclosed, and the Prime Minister remained in intensive care at St Thomas’ Hospital - mercifully ‘stable’ and ‘responding to treatment ‘- the question confronting government and businesses alike was clear enough: how to maintain the humanitarian focus of HMG’s strategy without causing irreparable damage to the economy?

WHAT CAN THE TREASURY DO?

  • The tensions between the Department of Health and Social Security and the Treasury are not intrinsically destructive. From such internal debate, and the presentation of competing claims, a sensible and sustainable consensus should (and must) emerge.
  • The government is immediately and correctly concerned with saving lives. But responsible ministers must also ensure that preparations are made to unwind the lockdown when it is safe to do, and to rebuild the economy thereafter. Even though there is unlikely to be any immediate relaxation, the government needs - in the next week - to present the basis of a route map, and describe the landmarks ahead that will trigger phased ending of the lockdown.
  • There are fiscal and monetary tools available to stimulate demand - targeted tax relief, for instance. The relaxation of the lockdown should also, by definition, restore much of the demand that is presently suspended by physical constraints. This will be dependent, of course, upon the successful advance of testing - not only of frontline workers but of the general population. The antibody tests that establish whether a person has had the virus are not yet sufficiently reliable to go onstream in the UK.
  • Supply-side measures are usually strategic in character (notably, to improve productivity). In these extraordinary circumstances, they are tactical - and it is important that ministers resist the political temptation to persist with supportive measures longer than is economically rational.
  • It is reasonable to remove barriers to bank loans, provided that the risk of moral hazard is not forgotten. Failing businesses should not be subsidised. Some trends that were already established - the decline of the high street, for instance - will be accelerated and there are limits to what government should do to distort the operations of the market.

THE GLOBAL PICTURE

  • The global economy will not return to anything like normality before the arrival of a vaccine.
  • It is unsafe to assume that the present spirit of broad cooperation between nations will endure. As lockdowns are phased out around the world, there will be much more impatience with what appear to be unacceptable forms of state aid, border controls on goods, and unfair protectionist practices.
  • Even so, the case for international coordination must be made vigorously. The principal forum will be the G20 - under Saudi presidency - which has the merit of including China. No global undertakings that do not include the US and China will succeed - which is why the disagreements between the two economic giants are so concerning.
  • The World Bank and IMF will have a role to play - printing money and extending credit. Again, their efforts will be hamstrung without US support (at a time when the Trump administration remains hostile to international organisations, most recently the WHO).
  • The crisis has revealed the tension between efficiency and resilience - and, without resorting to full-blown protectionism, nations should look at the capacity of their supply chains to withstand future shocks.