By Adam Lloyd, Capital Markets
The economic impact of the lockdown has been profound with the unemployment rate growing to 4.5% in the three months to August. According to the ONS, an estimated 1.5 million people were unemployed between June and August and the outlook is looking pretty grim with some forecasts suggesting that unemployment will rise as high as 8.5%. That means as many as 2.9 million people could be out of work before we see any economic recovery.
As stark as these numbers are the burden of unemployment will not fall equally across society. Unemployment has increased by over 500,000 since the pandemic began and of, those, about 300,000 are in the 16-24 age group. Almost two thirds of the unemployed are young people entering the job market for the first time and if the projections are correct we could see that number increase to over 1 million.
So why do we have lockdowns and what legacy does our response to the pandemic leave for future generations?
Since the Corona virus first made it to the UK there appear to have been three possible policy responses: mass vaccination, development of herd immunity and control of the virus through lockdown.
We don’t have a vaccine yet and even with the herculean efforts of the world’s pharmaceutical industry to develop one it will take time, with the best estimates suggesting an effective vaccine being available in the latter part of 2021. More than a year after the outbreak began.
The scientific community is becoming increasingly divided on the issue of herd immunity (exemplified by The Great Barrington Declaration) but the prevailing argument has so far been that it is an unreasonable policy choice based on the projected number of fatalities in such a scenario. It seems that in all likelihood, herd immunity will only be truly effective alongside a vaccine, so these two options are currently regarded as being just one response.
The vast majority of countries have chosen to adopt the third option: to buy time by controlling the spread of the virus with lockdowns of varying severity despite the inevitable economic cost.
The unemployment figures already tell us that the cost is high so it should be no surprise that since going into lockdown in March the UK economy has suffered its greatest fall since WW2. Gross Domestic Product (GDP) has fallen by more than 22% since the end of March. To put that into context, the financial crisis of 2008 caused the UK economy to fall by just over 6% and that fall was considered grave enough to galvanise the world’s central banks into providing massive economic support.
The UK Government’s economic policy response to the pandemic lockdown has been significant. Whatever your views regarding the timing or quantum, the fiscal packages that have been introduced by the Chancellor have seen an extra £200bn pumped into the economy to support jobs, businesses and incomes. Following Rishi Sunak’s latest announcement of job support measure this figure will only go up. One can only imagine what the GDP and unemployment figures would look like without this intervention but that thought will be of little consolation to those losing their jobs and facing an uncertain future.
So how do we pay for all this?
It is widely estimated that we will need tax rises of more than £40bn a year or UK government debt will spiral out of control. One need only think of Greece to understand what damage too much national debt can cause. The Institute for Fiscal Studies (IFS) has stated that government borrowing – the Public Sector Borrowing Requirement (PSBR) – will hit levels not seen since WW2. The IFS further states that while the spending is necessary it will mean large tax increases having to be levied into the middle of the next decade. This time horizon is especially worrying when we consider that it will be those in the 16-24 age group who become the nation’s principal tax payers in the coming decades. The people facing the most challenging job prospects as a result of the lockdown will, in effect, be forced to pay the highest price; terrible job prospects today and much higher taxes when you do find work tomorrow. Perversely the 16-24 age group are among the least at risk from the coronavirus.
The balancing act and political judgements necessary in these unprecedented times are unbelievably difficult. Weighing the cost to one against the benefit to another will never have a perfect solution but it is hard to see how placing the burden of spiralling national debt on the next generation is in anyway fair without offering the potential for a better future. And we haven’t even talked about the effect of lockdown on education.