Can we afford this?

Written by Peter Urwin, Professor of Applied Economics, University of Westminster

Yesterday the Chancellor extended the job retention scheme to October. Business groups and unions cheered, but how much should the government spend?

Spend too little now, and the economic scars will be with us for years, as unemployment destroys skills, viable companies go bust and investment stagnates.

Spend too much, and the debt burden could usher in another age of austerity, with over 10% of tax receipts used simply to service debt.

Key to pulling off this balancing act is an understanding of what the path to recovery will look like – a fast-growing economy can carry more debt, just as a higher income allows you to borrow.

It is becoming apparent that the pandemic will have substantial, rather than transitory impacts – this implies higher spending, but I argue that future growth rates will allow us to more easily carry higher levels of debt.

The pandemic has brought forward structural changes in the way we shop, work and travel that would have arrived – but not for another 15 years. In this future economy we no longer travel two hours for a one-hour face-to-face meeting; we engage in online conferences rather than destroying the environment; and bricks and mortar are no longer needed to host our consumption.

In contrast to previous economic shocks, this one supercharges structural changes that are inevitable and increase economic efficiency. In common with previous shocks, change is very painful.

The 2030 economy will have higher levels of productivity and some will be working in this economy from 2021. However, the pain of such a wrenching transition falls on the most vulnerable. Spend now, because we can pay later.