- Without ambitious cash injection in spending review, economy will still lag 7 percentage points behind pre-Covid level next year
- Building back better for a fair, strong and green economy will mean less debt as share of GDP, not more, IPPR finds
- ‘No time to be timid’ or UK will struggle to recover ground lost to Covid and miss moment to rebuild a resilient welfare state
The UK economy needs an ambitious cash injection of £164 billion in the year 2021-22, according to new analysis by IPPR, to restart it fully after the Covid crisis and set it on course for a fair, strong and green recovery.
In a far-reaching review of the economic prospect as the Chancellor prepares for this week’s spending review, IPPR warns that this is no time to be timid. There has never been a better moment to invest in the UK economy and welfare state, the think tank argues in a paper published today.
Borrowing more to set the economy moving faster will actually mean lower debt as a share of GDP than the more cautious approach being urged by some, according to IPPR analysis.
The £164 billion fiscal stimulus will be needed to tackle the health crisis and stabilise the economy; deliver all the climate investments needed to reach the UK’s net zero emissions target; and restore public services to their pre-austerity level by the end of the parliament, the think tank calculates.
Failure by the Chancellor to take action to boost the economy further would risk leaving the UK on average seven percentage points behind its potential next year, the report finds – locking in what IPPR calls a “93 per cent economy”.
That would mean:
- A further 1 million people unemployed in April 2022, due to an unnecessarily slow recovery and lack of job support measures
- Failure to achieve the government’s own priorities on levelling up and meeting the UK’s net zero emissions target
- Diminishing the prospect for stronger long-term and sustainable growth of the UK economy
- A higher long-term burden of UK debt as a share of GDP – as borrowing more now for a greater fiscal stimulus would actually decrease government debt as a proportion of GDP, through faster economic growth
The report, The Chancellor’s Challenge: delivering a stimulus for post-pandemic recovery, argues that this week’s spending review should consider two stages of recovery from the Covid crisis.
It says the Chancellor should provide continued fiscal support during the “rescue phase”, which IPPR says will extend through the first six months of next year – aimed at supporting incomes and preventing otherwise viable businesses from closing, as the hoped-for vaccine roll-out gets under way.
Then, during the “reopening phase” in the second half of next year, he should promise support for overall demand and economic activity.
The recovery must have economic, environmental and social justice at its heart, and include “future-proofing” the welfare state so it can better withstand future shocks.
The stimulus would mean billions of pounds extra each year for the devolved administrations in Northern Ireland, Scotland and Wales through additional consequential funding.
Overall, IPPR says, the government should acknowledge three broad spending priorities:
- Public investment for a greener, stronger economy– beginning by committing to invest all the additional £33bn a year which IPPR previously calculated was needed to deliver the UK’s net-zero emissions target and restore nature. Combined with a much-needed expansion of social care, this could create 1.6 million jobs over the next decade. It would put the UK on a more certain path to net-zero than the relatively modest increases announced by the government over recent months – including in the Prime Minister’s new 10-point plan.
- Strengthen the welfare state and rebuild its resilience, to better support individuals, families and the economy. That means continuing emergency measures to tackle Covid-19; boosting financial support for families as part of a “family stimulus” alongside other improvements to universal credit; investing in “catch-up” funding for health, public health and social care; and restoring spending in all other areas including grants to local government to pre-2010 trends, to reverse effects of “austerity”.
- Support businesses and workers for a stronger, fairer economy– through support for work sharing and retraining as the economy begins to reopen, and protection of businesses through financial support that is conditional on a financial, social or environmental return to the taxpayer and broader society.
Carys Roberts, IPPR Executive Director, said:
“The pandemic has had dire consequences for people’s lives – not just in health terms, but economically. Almost a million people have lost their jobs and the number of families with children using foodbanks has doubled.
“This tide of hardship will only swell without adequate support for the economy, including through ‘scarring effects’ that will make it harder for businesses and people to survive and thrive. Decisions taken today will determine whether businesses can recover, and the state and shape of the economy for years to come.
“But there is no ‘going back’ to the pre-pandemic economy, as if its course had merely been paused. Instead we should use government intervention now to build back the kinds of economic activity we really value, instead of pursuing only GDP.
“We should focus on growing the jobs and industries that will enable us to reach net-zero, fix the long-standing weaknesses in our economic model, and build a resilient welfare state to serve every family well and withstand crises of the future.”
Carsten Jung, IPPR Senior Economist, said:
“We face the extraordinary challenge of an economy permanently damaged by the pandemic – the Chancellor’s response must be commensurate with its scale. Our proposed approach will stabilise GDP, and bring back demand, jobs and dynamism into the UK economy. At the same time, it will bring about a permanent structural shift in the economy, towards sustainable production, green jobs and better work.
“Our call for a £164 billion stimulus may sound large but, in fact, it is economically the right thing to do. It’s about 40 per cent less than the government will have spent on the coronavirus crisis in the current fiscal year. And with interest rates at an historic low, our analysis shows it will actually result in a lower national debt, relative to the UK’s output, compared to a more cautious approach. We can’t scrimp and save our way to paying for Covid, we can only grow our way to do so.
“In other words, as we emerge from this crisis, fiscal stimulus has become fiscal responsibility. Now is not the time to be timid.”