This sounds like a lot of money, but in real terms it is not anything like enough to restart the economy in the manner suggested by the Government. In the heady days before COVID-19, Chancellor Rishi Sunak announced new investment into infrastructure in the UK totaling £600bn between now and 2025. By comparison, £5bn is nothing like what is required to "level up" the economy in the way promised by the Chancellor. In his Dudley address, the Prime Minister confirmed that the £5bn promised was an accelerated release of those funds promised by the Chancellor, but it remains to be seen whether that £600bn will ultimately be released.
Nor is it the "New Deal" of which the Prime Minister spoke. As a percentage of GDP, the Government's investment pales into insignificance compared to the cash injected into the US economy by Roosevelt's Democratic administration during the Great Depression. Moreover, Roosevelt's New Deal ultimately saw six years of continuous, heavy investment into the US economy prior to World War II; for the Prime Minister to make those comparisons he must have the same ambitions.
It may be said that the US economy of the 1930s is very different to the UK economy of the 2020s, and that is true. For example, prior to the Great Depression, the US national debt was 29% of GDP; in contrast, as has been well-publicised, the UK's debt currently exceeds 100% of GDP – the first time it has done so since the post-war period. In addition, much of Roosevelt's investment was aimed at providing a substitute for the kind of financial support that the UK government has been providing to businesses and individuals since the lockdown hit – support which has contributed significantly to the UK's increased borrowings.
On the other hand, there is no question that the UK economy needs the kind of investment that Roosevelt's New Deal provided to the US economy. The UK's double-digit drop in output risks heralding a post-coronavirus recession comparable to the situation faced by the US in the 1930s unless drastic steps are taken now to address the situation.
Equally, the UK has the tools available to it to do so. Rarely has borrowing money been so cheap for a UK Government, to the extent that the Government has been able to sell bonds at negative interest rates; investors are literally paying the Government to lend the UK money at the moment.
In addition, the UK currently has a relatively strong and stable construction industry that is well-placed to respond to any demands placed upon it by the Government. The general feeling is that UK construction has been able to weather the COVID-19 storm more effectively than was perhaps initially predicted.
However, if the Government delays, it is likely to find that the cost of borrowing will increase. In addition, as time continues to pass the construction industry is likely to feel the effects of the post-coronavirus recession, to the extent that it may struggle to be able to rebuild Britain in the way the Government envisages – particularly if Brexit creates or contributes to skills and materials shortages in the way some have predicted.
In those circumstances, the £5bn promised by the Government must only be the first drops in what will need to become a flood of public spending.
In contrast, the USA's own economic rescue package – the aptly named Moving Forward Act – promises $1.5trn of investment over 5 years into roads, bridges, transit, rail, schools, housing, broadband, water, clean energy, healthcare and more besides. It is, by any measure, a far bolder and more comprehensive portfolio of investment into the US economy than anything the UK Government has yet announced, and should offer a valuable prompt to the UK Government as to its next steps.
The message to the Government, then, must be to strike whilst the iron is hot. If the Government is bold enough to invest now and invest heavily, Boris Johnson may be able to achieve his dream of "levelling up" Britain. If the Government dithers, the opportunity may be lost and the country may slide into a new depression.
Originally published 02 July, 2020
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