Six ways Covid-19 will change business, politics and the economy

Matthew Elliott, Senior Political Adviser

The historian A. J. P. Taylor opened his seminal English History, 1914-1945 with the observation that “Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman.” He went on to chart the expanding role of Government in the first half of the 20th Century, which then accelerated after the Second World War, before retrenching in the 1980s, and then beginning a slower, more modest expansion from the turn of the 21st Century.

It is notable that the two major expansions were triggered by World Wars, and it is another global war – this time against the invisible pandemic Covid-19 – that has triggered an expansion of state power like we have never seen before in our lifetimes. To be clear, this is not to criticise the Government’s response to Covid-19. But it has heralded a business environment where success or failure is more dependent than ever on the decisions of politicians, both in the UK and internationally.

Much has been written about the various schemes designed to help businesses get through the immediate crisis, so I will avoid repeating that information here (although I would be interested in hearing the views of readers on both the strengths and weaknesses of the Government’s economic response). Instead, I consider six political trends emanating from the crisis that will affect the business environment over the medium to long term:

  1. Government support for businesses will continue for some time
  2. Minimising unnecessary regulation will be a key economic stimulus
  3. Environmental action will not be a victim of the crisis
  4. Talk of extending the Brexit transition is premature
  5. A US-UK trade deal is now less likely
  6. A new economic cold war between China and the West has begun  

 

1. Government support for businesses will continue for some time

A Treasury minister recently described our current economic situation to me as follows: “It is easy to overdramatise current events in comparison to what has happened historically. But make no mistake, the economic shock we are going through now is not 2008 or Black Wednesday, or even 1970s stagflation; it can only be compared to the Great Depression in terms of its impact and how it will affect our lives.” This explains why the Government’s economic response was unprecedented in its magnitude and degree of intervention in the economy. But how long will this support be sustained?

The Financial Conduct Authority uses the analogy for the economic response as trying to build a bridge from one side of the crisis to the other. “The trouble is, we don’t know how wide the river is, so we’re building a bridge in the fog, into mid-air, hoping we’ll be able to make it to the other side.” The additional complexity is that the different phases of the crisis will require different economic responses. “Where the bridge analogy breaks down, is that there is no end point, so our bridge might end up looking more like the Florida Keys – a series of bridges.”

Given the scale of the economic crisis, and the need to prevent it from morphing into a financial crisis, I expect Government support for businesses to continue beyond the immediate crisis. It is in this for the long haul, so the business community will not be expected to walk straight home after leaving life support; it will be supported in its recuperation. Afterall, unlike in 2008, this crisis did not come about from any reckless business activity (aside from the wet market in Wuhan), so the government recognises that the UK business community deserves its support.

With some estimates putting Government borrowing this financial year at over £300bn – a deficit never seen before in peacetime, and far outpacing the years around the financial crisis – the inevitable question is how this will all be paid for. Intriguingly, I am hearing a suggestion that because this additional spending came about because of the war against Covid-19, it should be treated as a separate ‘war debt’, and paid off over many decades, rather than a short number of years. The logic supporting this approach is that because the war on Covid-19 has hit the balance sheets of every country across the world, countries will not be punished for taking this approach – it will not be treated as reckless expenditure.

This approach chimes with what the Prime Minister told The Spectator in the runup to last year’s general election, when he spoke about his discomfort with David Cameron’s cuts in the aftermath of the financial crisis. “I remember having conversations with colleagues in the government that came in in 2010, saying ‘I thought austerity was just not the right way forward for the UK’.”

For this reason, I do not expect to see swingeing spending cuts to compensate for the fiscal response to the crisis. As in the years following the financial crisis, these cuts would likely hit the very people we have all clapped at 8pm every Thursday during the lockdown.

Instead, I expect the Government to double down on the approach outlined in the election campaign of significant infrastructure expenditure, investment in science and technology, and ‘levelling up’ the regions. And if more money needs to be borrowed to rebuild the economy after the war on Covid-19, then it will be added to the war debt. And the hope will be that this investment results in supercharged growth, quickly winnowing the debt away. 

    

2. Minimising unnecessary regulation will be a key economic stimulus

The major focus has, for obvious reasons, been on the fiscal stimulus the Chancellor has given to the economy. And many are understandably concerned about the future economic effect when programmes such as the furlough scheme are withdrawn, or tapered away, or if taxes are increased to bring the deficit back under control. In an era where the fiscal bazooka has already been fired, and interest rates are effectively at zero, what other economic stimulus can be used to help bring the economy back to growth?

One underused club left in the Chancellor’s golf bag is the regulatory burden. All sorts of new laws and regulations have been introduced as part of the lockdown, from allowing the police to move people on from enjoying picnics in parks, to demanding the immediate closure of thousands of businesses up and down the country. But what has virtually gone unnoticed is the fact that governments in both the UK and overseas have simultaneously liberalised certain regulations to help deal with the crisis.

One example is allowing pubs and restaurants to switch from serving food in-house to takeaway delivery. A number of competition laws have been relaxed to allow retailers to pool staff, share distribution depots and delivery vans, and compare data on stock levels. The 5p tax on plastic bags has been waived. And permitted daily driving hours have been increased for deliveries of food, household essentials and pharmaceutical products.

A similar process is happening in the United States and other countries. Governor Cuomo of New York, for example, is allowing bars to operate as off licences, and Americans for Tax Reform has identified a total of nearly four hundred regulations which the Federal Government has waived. And in Germany, supermarkets have been allowed to open on Sundays.

All of these examples of the regulatory burden being lightened are trivial in comparison to the economic hit that Covid-19 has dealt the business community. But if allowing pubs to provide takeaways is shown to not have any negative externalities, then policymakers might well be more open to using the one economic tool they have left – deregulation – to rebuild the economy after the crisis.

 

3. Environmental action will not be a victim of the crisis

One of the early cancellations arising from the crisis was COP26, the 26th United Nations Climate Change Conference due to be held in Glasgow at the end of the year. Its postponement, combined with Rishi Sunak’s decision to continue the Fuel Duty freeze in his March Budget, led some people to suggest that environmental action and the 2050 net zero target would both fall victim to Covid-19.

Environmentalism and action on climate change have often been portrayed as a luxury policy option; affordable in the good years and quickly dropped when times are tough. I do not think Boris Johnson’s Government will follow this approach. Environmental action is now a core part of the Conservative Party’s beliefs and brand.

Instead, I predict a phrase we will come to hear more of is ‘Build Back Better’ – a concept previously developed to guide the recovery and reconstruction phases after a disaster. Once we are beyond the immediate crisis, and can turn our attention to national recovery, I expect the Government to return to some of the themes from the general election manifesto and the Budget.

On the green agenda, I can see there being an increased focus on sustainability, with greater investment in green technology and renewable energy. I can see a push to reduce our dependence on imported food, and a renewed interested in vertical farming.

More generally, with science having played such a central role in the response to the crisis, particularly life sciences, I predict the Government will place even more emphasis on science and technology going forward. Expect extra, targeted spending on universities and (I hope) a recognition that overseas students not only subsidise domestic students, but also very often go on to contribute much to our economy and society more generally.

 

4. Talk of extending the Brexit transition is premature

Ever since the Government negotiated Britain’s exit from the European Union last October, it has been popular to suggest that the transition period will need to be extended beyond 31st December of this year. In fact, there is a notable overlap between the commentators who predicted that the Prime Minister would fail to successfully negotiate a Brexit deal, and those who now suggest that the transition period will need to be extended.

Talk of an extension is premature and I expect the Government will keep to the current timetable. Whilst it is undoubtedly the case that the Covid-19 response has occupied considerable bandwidth for both the UK and EU since March, negotiations about the new EU-UK trade deal have continued and, some say, have been assisted by being out of the media spotlight. For example, much of the work is already done for financial services companies. Despite the crisis, questionnaires about equivalence are still going backwards and forwards between the UK and EU; the process is just not capturing the headlines.

With Boris Johnson back in Downing Street, No10 has made it clear that he is now taking charge of the negotiations to inject fresh “political impetus” into the process. This is not the announcement of a Government planning to use the crisis as a reason to extend the transition period, which is why I believe that such talk is premature. Two developments are worth noting:

First, whilst many Conservative Parliamentarians privately felt uncomfortable with the idea of a ‘No Deal’ Brexit last summer, the prospect of a ‘No Trade Deal’ Brexit at the end of the year looks like a minor blip in comparison to the current crisis. The ability to walk away from the negotiating table is therefore infinitely greater than it was last year.

Second, whilst EU member states were notably united during the Brexit negotiations last year, the Covid-19 crisis has exposed their differences. Brexit galvanised them around one issue; Covid-19 has exposed their divisions. Where is the EU-wide coordination to fight the war against coronavirus? Where is the package for (richer) northern member states to assist the (poorer) southern members?

Therefore, if anything, the negotiating advantage has switched to the UK and the Government’s resolve to complete the Brexit process by the end of the year will have been strengthened, even with it now being the second most significant issue of Boris Johnson’s premiership – something few would have predicted at the beginning of the year.

 

5. A US-UK trade deal is now less likely

For those hoping for a US-UK trade deal, the stars seemed to be aligning in February: we were in the transition period and therefore permitted to begin formal trade negotiations with other countries; President Trump was keen to agree a deal to demonstrate to US voters, in light of his trade war with China, that his instincts were not purely protectionist; and there was a strong incentive for the UK to agree a deal, to drive home the advantages of Brexit.

Despite the welcome news that the trade negotiations between the US and UK have begun, a deal now seems much less likely than it did earlier in the year, and not just thanks to the loss of bandwidth from the crisis. Trump went into the year as the odds-on favourite to win re-election. Supporters still put it at 50:50, but more impartial observers (many of whom admittedly called it wrong in 2016) now see a Joe Biden victory in November as being the most likely outcome for the Presidential election. Trump’s strongest calling card was America’s low unemployment and strong growth, so with the collapse in economic activity and record numbers claiming unemployment benefits, his chances are clearly diminished. 

A US-UK trade deal would be much less likely with a President Biden in the White House, because the Democrats would almost certainly prioritise a deal with the European Union. The Transatlantic Trade and Investment Partnership (TTIP) – the US-EU trade agreement discussed before President Trump’s election in 2016 – would likely be returned to. With the misconception that the Brexit vote and President Trump’s victory in 2016 were analogous, and the strong influence of the Irish Government in US politics (entirely justified – the UK has a woefully poor presence in DC), TTIP mk. 2 would likely come before a UK-US trade deal.

That said, we should persevere in agreeing a deal with the US. And we should learn from the Irish Government when it comes to pressing home our interests overseas. The UK has much to offer the US in a trade deal: we are the biggest international investor into the US, we have a natural cultural and linguistic affinity, and we are a close ally on foreign affairs and in NATO. President Trump might feel a greater kinship with the UK than Joe Biden, and have a greater affinity for Brexit, but the potential advantage to both countries in agreeing a deal are infinitely more substantive.    

 

6. A new economic cold war between China and the West has begun

Many critics of President Trump make the mistake of assuming that he is wrong on every issue. Some even take pride in being on the opposite side to the President on any issue of public policy. But for every statement clearly beyond the pale (injecting disinfectant to treat Covid-19 comes to mind), there are other big issues he has called correctly. Take, for example, the need for other NATO members to increase their defence spending, rather than piggybacking on the US military. Or more pertinent to this crisis, his scepticism about the motivations of the Chinese Government.

This crisis will undoubtedly result in a more sceptical stance towards China in the West. Some have even predicted a new economic cold war, especially when voters properly understand the economic devastation resulting from Covid-19, and the Chinese Government’s negligence in warning other countries about the imminent pandemic, which has undoubtedly cost thousands of lives.

In the UK, Conservative MPs have set up the China Research Group (CRG), purposefully modelled on the highly successful European Research Group (ERG). This group is being led by Foreign Affairs Committee chairman Tom Tugendhat MP, with Neil O’Brien MP acting as secretary. Both are highly competent and widely respected in the House of Commons and the Lobby (of political journalists), so the chances of Huawei being brought in to build the UK’s 5G network are now severely diminished, and I would expect the group to flex their muscles on other Sino-British matters too.

That said, China is still the second biggest economy in the world by share of global GDP. One of the drivers for Brexit was to allow Britain to forge deeper ties with the fastest growing economies around the world. We need to be less naive about the Chinese Government, but we still need an economic relationship with China. Just as we need a stronger relationship with India, and other growing markets. Covid-19 has certainly highlighted a fault line in globalisation, but the ‘new normal’ should not involve us becoming more insular. Britain is at its best, and its most prosperous, when it is most international.