COVID-19: part two, the economic impact of lockdown
If you are under the illusion that the plaudits being heaped on the NHS and its staff by our political leaders will swiftly translate into billions of pounds for the public health sector after the current COVID-19 crisis, then think again. In the past month it has become increasingly clear that not just the British economy, but the world economy, is being savaged by the pandemic. So, in spite of the hints dropped by Foreign Secretary Dominic Raab in 10 Downing Street’s daily press briefing two weeks ago, the government’s finances are going to be in such a dreadful state over the next few years that the best NHS staff can hope for is a token pay rise. However, given the public mood the NHS should evade another round of health sector ‘austerity’, as imposing that would be tantamount to committing political suicide. But how bleak is the economic outlook? And if it is as bad as many of the best economists in the world are suggesting, how do we ensure long-term financial sustainability of the NHS in the post-COVID-19 era?
To take the economics first, last week (April 10), the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, issued a cri de coeur, calling on ‘humanity…to harness its greatest strengths’ to confront ‘a crisis like no other’ as ‘we anticipate the worst economic fallout since the Great Depression’. Over this year, of the 189 nations who are members of the IMF, 160 will experience declines in national income per head, she said. This is the exact opposite of what the IMF expected three months ago.
How can this be? In his seminal study of the Great Depression era ‘Golden Fetters: the Gold Standard and the Great Depression,’ the renowned economic historian Professor Barry Eichengreen writes that most people think it started around the time of the Wall Street crash of October 1929, but, he says, business activity was already weakening over significant parts of the globe in 1927/28. The USA was hardest hit, with the slump beginning in late 1929 and continuing until early 1933. From peak to trough, real gross domestic product fell 30% and unemployment soared to a peak of over almost 25%.
The contrast with events today is striking. In the space of around three months the global economy has fallen off a cliff edge, it is still in freefall, and nobody knows where the bottom is. The sheer speed with which the crisis has engulfed the world was described in detail in the IMF’s comprehensive World Economic Outlook, published April 14. On April 10th , however, research published at the Peterson Institute for International Economics (PIIE) suggests that in the April-June quarter America’s output ‘is on track to decline at an annual rate of 50% (and) the US unemployment rate will hit around 20% in the early summer.’ The research projects a vigorous recovery in 2021, but such predictions hinge on what some will see as optimistic assumptions.
Economists at J.P.Morgan Chase, the giant American investment bank, are not alone expecting similar declines. China, the world’s second biggest economy, officially published national output figures for the first quarter showing a year on year decline, which is the first time this has (officially) happened since the 1970s.
In Europe, official sources in Germany and France have indicated that those two countries are already in recession. In the UK, meanwhile, the prestigious National Institute for Economic and Social Research warned on April 9th that if the current lockdown continues, which it is doing, there will be a 5% fall in national output in the first three months of the year, followed by a further 20% fall in the second quarter: ‘The lockdown is causing the largest contraction in economic activity since 1921,’ it said.
The pace of these declines is in itself destructive, not only of confidence, but also of the capacity of businesses to adjust and to recover. Some are comforting themselves with the view that, unlike in 2007/8 financial crisis, this time the banks seem to be in better shape. However, the truth is not so clear cut as the Chairman of J P Morgan noted on April 7th. Since 2007/8 it is correct that most banks in the UK (and in most advanced economies) have strengthened their balance sheets; however, high risk lending has continued to soar, migrating from banks to so-called ‘shadow banks’. Nobody knows how the corona-related losses will be absorbed, or how big a hit the banks will have to take not only from their own exposure to this “shadow” sector but also to the thousands of non-financial sector companies which will fail. A hint of the anxieties about the global financial system came last month when the US Federal Reserve agreed to provide inter-governmental dollar credits (Swaps) to thirteen countries, ‘to maintain the flow of credit during the coronavirus epidemic’.
However, ‘unknown unknowns’ proliferate. There are no reliable economic models or theories that can be applied to the world’s economies to illuminate what is happening. What might happen is also problematic. Professor Charles Goodhart, a renowned monetary, financial and economic expert and former top government policymaker, warns of the risk of ‘a surge in inflation’. Professor Bo Becker, of the Stockholm School of Economics, worries that the heavy debt burden in companies will obstruct economic revival.
So what about the NHS and its ‘Cinderella’ sister, care homes? As long ago as October 2016, the Nuffield Trust, in evidence to the House of Lords Committee on the Long Term Sustainability of the NHS and Adult Social Care, said that the Office of Budget Responsibility’s projections for the growth of healthcare spending until 2030/31 (of just under £100 billion) could be met: ‘60% would come from projected growth in GDP and remainder from a combination of tax and re-prioritisation of public spending,’ it maintained.
The hit that the government finances will suffer as a result of the COVID-19 catastrophe will undermine current spending expectations for a health sector, in which for decades the growth of spending has consistently outpaced the growth of the economy. The government has consistently ducked publishing its assessment of how to reform the care sector and now its problems have become much worse; for it is recognised that, in the era of pandemics, that care homes have to be seen as part of an integrated health system.
What is urgently needed now, as when William Beveridge published his ground-breaking report, is a radical re-think of the healthcare system as a whole. This re-think needs to take seriously the lessons that can be learnt from overseas, including from neighbouring European countries. There has been much teeth gnashing in the Johnson government over the evidence that Germany, in particular, has coped far better with the crisis than we have.
In the UK the NHS and social care have been a political football for too long, kicked around by too many politicians trying to win votes, build their careers or demonstrate the purity of their ideological preconceptions. This must end. The NHS has dramatically reorganised itself in weeks. The selfless commitment of its, mostly underpaid and too often inadequately protected, staff has been extraordinary. The depth of expertise in our research universities and hospitals, an extraordinary competitive advantage in a cut-throat world economy, is being demonstrated daily. We must capitalise on these strengths. This means some MPs must accept the obvious: that the privatised American system is deeply flawed. We must be open to learning from abroad. Belgium, for example, has an excellent public sector, healthcare system. It allows better-off citizens to opt for standard hospitalisation fees or pay extra to have a room on their own or with a smaller number of patients. The citizens’ annual payments to finance the system are linked directly to incomes and to the health system.
The case for reform must be built on stakeholder participation, not the party-political dominated approach which has, demonstrably, failed miserably in the past few weeks. As in Germany, such a stakeholder approach, bringing together, regional governments, staff, healthcare unions, pharmaceutical companies, research institutes and universities to oversee the long term management of this vital socio-economic sector, must be examined. To cope in the years ahead we need a healthcare model that is both politically and financially resilient.