My Lords, I share the general appreciation of the Chancellor’s Budget and even the former austerians have joined the chorus of approval. What they were belatedly acknowledging was that fiscal austerity was the wrong response to the recession; here I must disagree with what the noble Lord, Lord Bruce, has just said. When private spending falls off, the correct response is to increase not reduce public spending, as George Osborne did between 2010 and 2016. The penny dropped that what a Government can afford is determined by the real resources that it can command, not by financial arithmetic.
So, “better late than never” was an intuitive response to the Chancellor’s cash injection. Providing £2.5 billion to fill potholes that should have been filled 10 years before now seemed more obviously sensible than to allow the number of potholes to keep growing until all roads became unusable. But I have one caveat. “Better late than never” may not be the right policy if the “late” comes at the wrong point in the business cycle. Keynes wrote:
“The boom, not the slump, is the right time for austerity at the Treasury.”
No doubt it does not feel much like boom time right now, and forecasts have suggested a recession. Nevertheless, today there is less surplus capacity in the British economy, and other western economies, than there was 10 years ago. In 2010, UK unemployment was 8%. Today, with less than 4% out of work, we are much closer to full employment. I know that the calculation behind the Chancellor’s stimulus was that the extra investment would draw workers from lower to higher-productivity jobs, thus boosting economic growth. That was a reasonable gamble, but it was a gamble all the same.
In any case, all this has been overtaken by the pandemic, which has led to the promise of an extra £350 billion to deal with it. The Prime Minister said:
“We must act like any wartime government”,
a sentiment echoed by the most reverend Primate the Archbishop of Canterbury. Let me say a word about the “war” metaphor, because it can be a source of some confusion. A war economy is above all a shortage economy; supply falls relative to civilian demand. To put it another way, it is an excess demand economy. People find it hard to get their heads round that idea because they are so used to the belief that crises come because demand has fallen, but a war economy is an excess demand economy for the simple reason that a part of supply has been taken by the state for other purposes—in the case of the war economy, for war purposes—and there is therefore less supply for civilian demand.
Today, the equivalent is that people, for very good reasons, are made to stay at home. It is sort of like conscription; suddenly there are fewer people available to produce supply and therefore the supply falls. That is what is happening. A fall in supply in that sense is independent of what is happening to demand.
What is happening to demand? That is the next thing. Although the Government have announced guaranteed loans only to businesses, it is certain that they will be driven to measures making it possible for firms to pay redundant workers their normal wages or, as in the United States, to pay wages directly—in other words, giving workers paid holiday for two or three months or whatever it might be. The likelihood is that incomes and demand will not fall as much as supply. That is when you get the typical war economy situation of excess demand. The essential point is that standards of living cannot be maintained for long if part of industry remains closed. At this point we will be faced with the alternatives of inflation or higher taxation, the question Keynes addressed directly in his 1940 pamphlet How to Pay for the War.
There are already signs of excess demand in certain retail sectors due to panic buying and interruptions of wholesale supply chains. In the short run, this may be choked off by a combination of informal rationing, which has already started, staying at home and voluntary saving. But if the pandemic lasts for more than two or three months—and we have no evidence of how long it will last—more drastic measures will be needed. That is some way off, but it is worth thinking about it and not assuming that there is a magic bullet which will keep all the jobs going and then somehow allow us to recover quickly. Sooner or later, we will all have to start paying for what we are now giving. There is no way out of that.