How to save the economy

The Covid depression, as it will surely be known, will be the deepest and at the same time strangest economic downturn of the post-war era. The OBR’s central forecast is that GDP falls 12.4 per cent this year, and unemployment rises from 1.3m in 2019 to 3.5m in 2021, with unemployment peaking at 12 per cent. Worst case scenarios are too horrible to contemplate.

This is also the strangest recession, since it will have been precipitated by a collapse of supply, not demand.

In the maximum lockdown period from March to July, the government simply closed down 25 per cent of the economy. Businesses were paid not to produce or sell goods, workers got 80 per cent of their wages for not working.

The original hope was that, as the economy awakened from the lockdown, businesses would resume producing, shops selling, services providing, workers working, and consumers consuming, as though nothing much had happened, and with most of demand intact. There were even forecasts of a spending spree.

It is now realised that this will not happen. Many smaller businesses have gone bankrupt. Continuing restrictions on normal working, shopping, and hospitality will hamper recovery of consumption, so many workers will not be re-employed. A savage demand shock will be superimposed on the initial supply shock. The government will be the one major player in the economy left standing on its own two feet.

Hence the crucial importance of the autumn budget. What the government has to do is to build up the public economy to maintain demand while the private economy slowly heals itself. Adding to private spending power will not itself bring back enough jobs as long as the inhibition to spending remains: it will simply increase private saving.

So as the furlough ends, the government should accelerate all public investment programmes and local authority job creation schemes.

The aim should be to galvanise an employment-led, not demand-led, recovery. A 12-month full employment guarantee would do more than anything else to encourage the revival of spending. And those who fret over out-of-control deficits should consider that it’s the impact of government spending on the economy, not on the budget balance, which matters in a slump.

There is a huge scope here for local authority initiative and imagination. Every locality has things worth doing, which would add value if they were done, but which are not done with austerity budgets in tight labour markets.

Local administrations should take inspiration from such historical initiatives as Franklin D Roosevelt’s Works Progress Administration (WPA) and Civilian Conservation Corps (CCC), which provided millions of American jobs in the Great Depression. Here is a Johnsonian “New Deal’ worth having.

Every local authority should invite suggestions from local inhabitants about how best to improve the amenities of their towns and countrysides and award cash prizes for the most promising and audacious schemes. Each authority should build up a portfolio of such projects to be “banked” as and when the economic situation allowed.

With millions more headed for unemployment this winter, now is the time to start.