Tthis is the critical moment. Since March, lockdown restrictions imposed earlier this year in the UK’s four countries have been relaxed, but only gradually. As Britain has been at the forefront of the global immunization effort, progress in opening up the economy has been relatively slow.
Everything changes on July 19, with a massive removal of legal restrictions on activity in England. The coming weeks will also see an easing of restrictions in Northern Ireland, Scotland and Wales.
Last week’s growth figures for May showed how the UK is reaping a small dividend from tens of millions of jabs. Production rose 0.8% – half of what experts expected – and was almost entirely attributable to the hospitality sector. Construction and manufacturing under contract.
The gradual approach to easing has now been abandoned in favor of regulatory fire. There are several reasons for this: a sharp increase in infection rates did not result in a comparable number of hospitalizations and deaths observed in the first months of the year; the Treasury is concerned about the impact of the continued restrictions on the economy and public finances; the antics of football fans after every England victory in Euro 2020 suggests that compliance with rules and regulations is much lower than at the start of the crisis and that lockdown fatigue has set in.
Summer is by far the best time to test whether vaccines can break the cycle of infections and lockdowns. The longer the strict restrictions on activity remain in place, the more likely it is that behavioral changes will take hold, leading to more job losses and business bankruptcies. There are clearly limits in a free society to the degree of compulsion people are willing to accept. There should be compelling reasons for the government to resort to legal restrictions rather than relying on individuals to take personal responsibility for their own actions.
That said, it is far from a risk-free strategy and if the bet turns out badly, there will be profound consequences: medical, economic, financial and political. A lot depends on how things go over the next six months.
Even on the most optimistic assumptions, the exit from the pandemic will be long and difficult. The length and severity of the restrictions mean that the events of the past 16 months will leave scars, with an acceleration of what was already shaping up to be painful structural change. Right now, the story is one of labor shortages; at the end of the leave in September, unemployment will increase and the need to find work for people displaced from their old jobs. It is only when government support is removed that it will be possible to see how many businesses currently operating with little or no working capital can survive.
The total opening of the economy from July 19 could change this picture. This could prove to be the catalyst for spending madness as consumers slash the £ 200bn in savings they’ve racked up since February 2020. Businesses could start investing again, easing bottlenecks supply and thus ensuring that any inflationary pressure is transitory.
For this scenario to materialize, however, the government will need to be prepared to overcome the increased infection rates that will result from the bonfire of statutory restrictions. Most individuals will behave responsibly, but a minority will not and this group will include super-spreaders.
People started to become more cautious even before the announcement of the first lockdown in March 2020. They worked more from home, avoided public transport, went out to stores less. This could repeat itself over the next few months if hospitals resume receiving more Covid patients.
Imposing a third lockdown would have a cost for the Treasury at a time when it wants to start repairing the hole in public finances. Rishi Sunak would be forced to rethink ending wage subsidies and increasing universal credit by £ 20 a week. There would be a further increase in both Whitehall’s spending and government borrowing.
The financial cost of a new lockdown would be eclipsed by the political cost to the government. Boris Johnson has a Houdini-like ability to escape trouble, but it’s hard to see how he could come out of such a setback. Even a limited reimposition of restrictions, such as wearing a mask, would be a colossal embarrassment for the Prime Minister. The latest poll shows that Labor’s approach – unlocked but at a more gradual pace – enjoys public support. Half of voters believed Freedom Day should be pushed beyond July 19.
The political support for the economy has been extraordinary. The Treasury has never borrowed as much in peacetime as it did last year, and the Bank of England has never set interest rates as low as 0.1% before. Threadneedle Street has also been hyperactive with the electronic printing press, through its quantitative easing (QE) program.
The rationale for this political support is that it will speed the UK’s return to pre-crisis normality, but this is easier said than done and in some ways betrays a lack of ambition. Britain’s welfare system was stingy before the crisis and will be stingy again when UC is abolished. Like other developed countries, the UK now appears to be constantly struggling with ultra-low interest rates and QE, which have deepened wealth inequalities by increasing the value of assets for the benefit of the already well-off. There are those who think that all this stimulus could and should have been better used, by investing in the green transition of the economy for example. Their voices will become much louder if the big bang fails.