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My Lords, it is a real pleasure to follow the noble Lord, Lord Hunt of Wirral, whose long experience and pragmatism is something that we in this House should all take account of.
Like other noble Lords, I want to concentrate on the broad economic outlook in these extraordinary times. It is said that in 1942, in the middle of the Second World War, William Beveridge said on publishing his report on the welfare state:
“A revolutionary moment in the world’s history is a time for revolutions, not for patching.”
I think we are all coming to the realisation that this extraordinary period may end up being revolutionary, not least in its impact on globalisation—or deglobalisation —and on our faith in the capitalist model underpinning these free societies.
Several analogies have been drawn between the financial crash and this coronavirus pandemic, but the profound difference is of time, scale and scope. With the financial crash, it took five months between the run on Northern Rock and its eventual nationalisation. In the case of Covid-19, it has taken 13 days from the first death on
Another difference is scale. Banks and large businesses going under undoubtedly impacted on a significant number of people very directly, but the indirect effect of lower public spending was a slow, long burn over many years, as other noble Lords pointed out. For me, the underlying risks to the economy are more grave this time and the level of uncertainty, as opposed to risk, is rising; hence the slump in global markets. We do not know whether a global recession, or indeed even a depression, caused by the pandemic will go beyond the current stock market slump to a full-blown financial meltdown, which will be of a different order of magnitude from that which we are planning for in loosening the purse strings.
We know that global regulation and financial buffers have made banks much more resilient and that the stress tests to evaluate bank safety have been made much tougher, taking into account multiple scenarios for shocks to the economy. However, the modelling has not anticipated the speed and depth of this pandemic, and its impact on regional and national lockdowns on supply and demand constraints. The equity market falls contemplated in worst-case scenarios of around 25% have already been exceeded, since some markets have fallen south of 30% in the last couple weeks. While central banks have countercyclical capital buffers, the question is whether they are deep enough to increase the capacity to lend to avert a credit crisis.
In this context, I note that calls for helicopter money, which has been mentioned by the noble Lord, Lord Lamont, are being considered in the US, where Steven Mnuchin, the Treasury Secretary, is contemplating a cheque of $1,000 for every American citizen. Here in the UK too, there are increasing calls for universal basic income. I note that the Prime Minister did not rule it out in Prime Minister’s Questions this morning. It is not surprising, since conventional economics holds that when interest rates are low—ultra low—debt can grow exponentially. I think that was the basis of the Labour Party’s spending splurge promised in its manifesto.
The current Government’s borrowing assumptions in the Budget were also predicated on that view, hence the £30 billion stimulus, which would have looked like good economics had normality continued in the market and the wider economy. While some speakers on the Labour Benches have used this crisis to suggest that there should have been no attempt from 2010 onwards to bring down the public debt, I am curious whether they think that the economy would have been able to withstand this particular crisis, or that this level of spending would have been possible, if we were still carrying a level of government debt of around 57% of GDP, as was the case in 2009. Of course, that excessive and extremely high public debt is a burden carried by future generations.
However, it has all changed now, and hard times call for new thinking. As far as helicopter money or universal basic income are concerned, if used to alleviate shocks to earnings and employment they must be for a very time-limited crisis response, since its overall effect on incentives and issues of equity will create free-riding. I think the noble Lord, Lord Skidelsky, said that we will all have to start paying for what we are giving. Some will pay more than others.
The Government should use every lever that they can at the moment, but in doing so they must surely be mindful that things can get worse, even from where we are today. At unpredictable times, we might be mistaken in thinking that we have hit the bottom, only to discover that our sight was blurred and that the bottom is still some way down. Foresight, not panic, should be the order of the day for both the Government and the public. Good judgment should drive the response, not the need to do something, even at this time of national crisis.