This is the second of two articles looking at last week’s budget. The focus of this article is the action the government announced to deal with the coronavirus.
In the budget there is a further £12 billion, if required, to deal with the Coronavirus: a further 0.535% of GDP. If the effect of the Coronavirus on the economy is to reduce economic growth to zero for one quarter or half of the year this total amount should be enough. However, the economic effect is likely to be much worse.
The government’s plans to help business deal with the Coronavirus are inadequate, because only small business and the leisure and hospitality industries are receiving 100% business rate relief.
The least the government could do is pay the statutory guaranteed payments for people who are put on short-time working. It now seems clear that some economic activities will cease.
Therefore all companies will need financial assistance. Providing loan guarantees of 80% on loans to businesses affected by the Coronavirus in inadequate and will not stop companies going bust because of the Coronavirus.
I like that the government has stated GP fit for work notes will not be required for Statutory Sick Pay and by implication by employers. Instead NHS 111 will provide evidence that a person has been told to self-isolate.
Most companies pay their staff at their normal pay rate for some time when off sick. The government paying SSP for two weeks while helpful is not enough. The government should be paying the full cost to employers of time off with coronavirus or self-isolating.
However, it is possible that more than a quarter of those now in work will have to start to claiming benefits either because they are made redundant or are on short-time.
This is why I suggested so much of the extra £15.74 billion I am calling for in my first article to be spent on benefits. It is possible that this increase in the number of people claiming benefits will lead to a step change to what is provided for those who are unemployed above what the £10.21 billion I have suggested provides.
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.
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49 Comments
Michael BG,
this is the announcement today https://www.independent.co.uk/news/uk/politics/coronavirus-chancellor-government-loan-business-economy-rishi-sunak-a9407381.html – a package of £330 billion worth of government-backed loans and more than £20 billion in tax cuts and grants to help business get through the coronavirus crisis (the equivalent of 15% of GDP) with a committment to extend the lending capacity to an “unlimited” level in order to help companies facing financial crisis.
The cash announced today is on top of the £30 billion economic stimulus announced in last week’s budget.
What the Government really ought to do is not to borrow this money but just to “print” it. A country that has control over its own currency can control the supply of money as it wishes. The dangers of doing this have always been that it would stoke inflation but the world has changed (before this virus took hold) and the Bank of England has had as much or more difficulty in getting inflation up to its target than bringing it down. And of course it’s done it before – it invented Quantitative Easing (and gave it an obscure name so that few would understand it) and in effect pumped £425 billion into the UK economy that way – to all intents and purposes printing new money. (The problem was that it was done to bale out the banks and all the new money went to them and into asset prices, making a lot of richer people richer and largely by-passing the poor). Instead even with all this new government spending the threat is of recession and deflation.
Rishi Sunak’s announcement today was all about support for business. The government’s main tool is loans. Loans may not be good enough. I suppose the loans could be partly written-off later. It seems that Rishi Sunak has said in the House of Commons today that loans will be available for businesses to pay their staff. I am very interested in the details of this.
A mortgage holiday will be useful but it should be linked to an extension of the life of the mortgage if the borrowers wants so those with mortgages are not hit hard by increased payments to recover the deferred payments.
There is talk of a package of employment support to be announced soon. Hopefully this will be large enough and of the right type to help all individuals.
Tony Greaves,
I thought most the £330 billion was being provided by the Bank of England. There was talk of People’s Quantitative Easing a few years ago. I think that it would be a good thing for the government to fund most of its coronavirus assistance from this source.
This is what countries around the world are doing https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723
Hong Kong is interesting. Their fiscal stimulus package among other things includes:
A $1200 cash subsidy to all adult permanent residents
Paying one month’s rent for people living in public housing
Cutting payroll, income, property, and business taxes
Low-interest, government-guaranteed loans for businesses
Extra month’s worth of payments to people collecting old-age or disability benefits
There is no alternative to a large fiscal stimulus now. However. the danger for the UK is we fall into the same position that Japan has found itself in for three decades and been unable to get out of- Low growth, disinflation and wage stagnation.
Japan’s debt woes began in the early 1990s, after Japanese real estate and stock market bubbles burst and caused a steep recession. Over the next decade, the BOJ cut interest rates from 6% to 0.25%, and the Japanese government tried nine separate fiscal stimulus packages. The BOJ deployed its first quantitative easing in 1997, another round between 2001 and 2004, and quantitative and qualitative monetary easing (negative interest rates on bank reserves) in 2013. Despite these efforts, Japan has had almost no economic growth over the past 25 years and its ageing population continues to thriftly save for the future rather than spend their government funded incomes.
The British government is making a “tactical error” in shutting down social life to combat the spread of the coronavirus, a move that could destroy the tax base and cripple the economy, JD Wetherspoon Chairman Tim Martin said on Tuesday.
People should avoid pubs, clubs, restaurants, cinemas and theatres, the government said on Monday, although Prime Minister Boris Johnson stopped short of ordering them to close.
“I believe the government will make a tactical error in resorting to de facto “lockdown”,” company founder Martin said in a stock exchange statement.
“Lockdown delays the inevitable and destroys the tax base at the same time, which will cripple the NHS (National Health Service) and the economy,” added Martin, a vocal supporter of the Brexit campaign.
https://uk.reuters.com/article/uk-health-coronavirus-jd-wetherspoon/wetherspoon-founder-criticises-uk-government-for-coronavirus-lockdown-idUKKBN2141Y5
Comment is superfluous.
Joe Bourke,
“and its ageing population continues to thriftly save for the future rather than spend their government funded incomes” (sic). We are not like that in the UK.
I am not sure giving cash hand-outs is the answer. Ensuring that most people do not lose any income I think is the important thing and I think this will mean that the government will have to pay employers to pay their workers at their full rates during the crisis. For the self-employed and those of working age not employed they should be paid benefit at the poverty level – £160.30 a week for a single person and £276.20 a week for a couple with £85.56 for each child. (If this happened I think the Pension Guarantee Credit for couples would also have to increase to £276.20 a week.)
Michael BG,
we are about to see if cash handouts is the answer. The USA is set to try Ben Bernake’s helicopter drop of money. The Trump administration has announced a plan to send a $1,000 cheque to every adult American within the next two weeks as part of a $1 trillion economic rescue package https://www.politico.com/news/2020/03/17/coronavirus-1-trillion-emergency-stimulus-133821
Treasury Secretary Steven Mnuchin warned senators that if they didn’t reach a deal quickly, unemployment could be as high as 20 percent. There is no time for calibration or fine tuning in these circumstances. Speed of action in getting cash into peoples hands is paramount to try and halt the slide.
The UK is like Japan, We to have an ageing population with increasing demands on health and social care costs. When an economic crisis hits people stop spending and the paradox of thrift sets in worsening the crisis. The US has a younger demographic, and greater numbers of economically inactive people, so it may just be possible that the Helicopter Ben cash will work there. We will see soon enough.
With large parts of the economy in lockdown some products will not be available to buy, such as having a sit down meal in a restaurant, going to the theatre or cinema. Therefore increasing aggregate demand by giving people a ‘cheque’ might just cause inflation. Also if given a ‘cheque’ I think people would be more inclined to save it, especially if they believe they will have a lower income soon. That is why it is important for the government to promise to pay people’s wages of the businesses that are not going to close down. Increasing benefit levels for those people who have to live on only benefits will do something to keep demand of these people up to some extent rather than having to stop spending on everything accept the necessities of life.
Michael BG,
direct cash payments are part of a wider stimulus package aimed at supporting business. Australia has announced a one-off $750 payment will be available from 31 March 2020 to social security, veteran and other income support recipients and eligible concession cardholders including pensioners. There will be one payment per eligible recipient https://www.bdo.com.au/en-au/insights/tax/technical-updates/australian-economic-stimulus-package-in-response-to-coronavirus-includes-tax-measures.
The package is Australia is quite limited at present, $17.6 billion Australian dollars and may need to be significantly extended as was done during the financial crisis.
Joe Bourke,
I don’t think the UK has ever used ‘cash’ direct payments, but other countries have. I have always favoured the government doing things and paying extra people the money who then re-spend it into the economy as the best way to stimulate the economy because my focus has been the reduction of the number unemployed. This time it is different. However, you have not given your opinion on what you think people would do with a direct ‘cash’ payment if they felt they would have to face a reduced income over the coming months? Do you not think it would be better for the government to ensure that those in work receive their normal pay and do not have it reduced because of coronavirus?
Michael BG,
I think it is a question of the right tool for the problem that you are trying to address. The shutdown of travel, leisure and hospitality businesses from the coronavirus pandemic has precipitated a supply-side shock to the economy exacerbating the disruption already caused as a result of the interruption of supply chains that are reliant on Chinese manufacturers.
China is returning to work and the shops are open for business. There will be pent-up demand to be satisfied by domestic producers and international brands in China alike.
Europe is now the epicentre of the pandemic and we have to go through the economic dislocation that China has experienced.
The first priority is enabling firms to stay in business and keep workers employed over the next few months. This will involve a combination of state guaranteed loans, grants, business rates and tax relief measures among others to support cash flow.
The second aspect is the impact on falling demand in the economy as households curtail spending. The government can’t buy plane tickets for people who don’t want to travel, theatre tickets, restaurant meals or round of drinks in a pub when people don’t want to go out. or buy domestic goods from high street shops that people don’t want to visit.
As spending falls, deflation sets in as businesses begin to reduce prices to attract customers and unemployment rises.
Direct cash payments or so called ‘helicopter money’ https://www.investopedia.com/terms/h/helicopter-drop.asp is an expansionary fiscal policy that is financed by an increase in an economy’s money supply. It could be an increase in spending, a tax cut or both, but it involves printing large sums of money and distributing it to the public in order to stimulate the economy.
Unconditional grants to business are a problem as the government has no effective control over how the money is spent even if it stipulates it is for wages. Direct cash payments to everyone eliminates the need for conditions. It is a temporary measure to stop a downturn turning into a deeper depression of the kind experienced in the 1930s., and in that respect may prove to be a useful part of the toolkit in addressing the immediate problem of a damaging downward deflationary spiral.
Joe Bourke,
“The first priority is enabling firms to stay in business and keep workers employed over the next few months. This will involve a combination of state guaranteed loans, grants, business rates and tax relief measures among others to support cash flow.”
I am surprised you haven’t included the government paying businesses who are adversely affected by Coronavirus the funds to pay their staff! I have pointed out that people are facing having huge cuts in income. It is not a matter of “households curtailing spending”. Would you be happy if every adult received £1000 no matter if they are working short-time with less than their normal income, had been made redundant now waiting for their meagre benefits or were working normally and receiving their normal wages? You haven’t stated your opinion on direct ‘cash’ payments if the people felt they would have to face a reduced income over the coming months. Or if it would be a good thing for the government to ensure that those in work receive their normal pay and do not have it reduced because of coronavirus?
All businesses who pay their workers more than £118 a week have to tell the government how much they pay them, so the government can know if the money they give companies to pay their workers is being used to pay their workers.
Michael BG,
Gordon Brown faced this issue during the financial crisis and has an article in the mirror today https://www.mirror.co.uk/news/politics/gordon-brown-act-now-thousands-21716479. I would take his advice as opposed to trying direct cash payments as he, like Alistair Campbell, has been there and done it. I would not, however, rule out anything at this stage including helicopter money on top of wage and job guarantees.
“…there was one missing element in the Chancellor’s statement: money was guaranteed to businesses without securing any agreement that they keep their workers on.”
“The Chancellor says he’ll devise a jobs package soon but France, Denmark, Sweden, Norway, Germany, Spain Italy and New Zealand are already days ahead, making job protection a condition of their financial injection.”
“It is absolutely right for the Government to give companies loans at zero interest rates, rates holidays and tax deferrals and grants to ensure they have cash flow.”
“America is considering mailing $1,000 – around £ 850 – to every family and Italy is giving €500 each to their self employed. It may sound attractive but President Trump doesn’t need the $1,000 nor do America’s millionaires.”
“It is far better – as the trades unions will explain – to offer wage support to those whose jobs are on the line – and – even if the epidemic lasts three months – those in real need should receive a multiple of that 1,000.”
“Retaining people in jobs makes sense. Today governments can borrow more cheaply than a decade ago. A 10% increase in debt-GDP increases annual interest costs by just over 0.1% of GDP.”
“Of course, there’s a cost to the Treasury but if there are millions out of work it loses their income tax, national insurance and VAT payments.”
“I am also struck by how much we are fighting this new war using only the weapons of the last war. For what about the new jobs that we can encourage from stimulating the online economy; deep-cleaning our buildings; and, in particular, investing in our still gravely under-financed NHS. Companies need to manufacture more ventilators. Hospitals need more acute beds. Food banks need cash help.”
Joe Bourke,
I might assume that you agree with Gordon Brown and think the government should be providing the money for employers to pay their workers and helicopter money should not be used, but I‘m never sure how much you agree with the quotations to give. Would you be happy if every adult received £1000 ($1000 is now about equal to £1000) no matter if they are working short-time with less than their normal income, had been made redundant now waiting for their meagre benefits or were working normally and receiving their normal wages? You haven’t stated your opinion on direct ‘cash’ payments if the people felt they would have to face a reduced income over the coming months. Or if it would be a good thing for the government to ensure that those in work receive their normal pay and do not have it reduced because of coronavirus?
Michael BG,
I think I have expressed an opinion “I would take his advice as opposed to trying direct cash payments… I would not, however, rule out anything at this stage including helicopter money on top of wage and job guarantees.”
This is effectively what is meant by ‘doing whatever it takes.’ As Gordon Brown notes in his article unemployment had increased to 7.9% by 2010 despite employer subsidies coupled with fiscal and monetary stimulus measures. There is no single silver bullet. It is a combination of policy interventions that will likely prove most effective in mitigating the impact on business, the self-employed and workers alike.
Apparently the Trump Administration has enacted the Defense Production Act in order to concentrate resources in expanding medical supplies and equipment (and other basic necessity) manufacturing supply chain, I think we should call for similar actions as well, to marshall our resources like we did during the World Wars to combat the diseases – and doing so can actually stop the predicted economic collapse.
Companies that receive financial support, especially the airlines, must be forbidden from engaging in stock buybacks and from paying excessive executive bonuses at least for three years (for companies that are bailed out, the ban on stock buyback must be permanent). Also, employee representation on board must be mandated as well, as a mandatory condition for financial support and bailout.
This is a one-in-a-lifetime chance for us to enact deep corporate governance reforms and rebuild our manufacturing industries.
Michael is surely right in saying that the important thing is for people not to lose income during the crisis, and it may well be that the government will need to provide money for employers to keep on paying their workers to ensure they have a steady income, if the businesses – government supported – continue to function. But I am also struck by the fact that, as Frankie quotes JD Wetherspoon’s chair as saying, shutting down the nation’s social life may have been ‘a tactical error’ – and if so, the fact that this hasn’t actually been enforced may be a good thing.
I went to my usual cafe in Cockermouth this morning for a coffee. Yes, it was still open, but it was very quiet. To continue it surely needs more customers. Moreover one of the other customers there was an old gent who goes there every day for his dinner, which I think is his only social life. So I suggest those of us who can should continue to go to such places, at least until social isolation is essential, and save the government”s money. There aren’t any victims of the virus in our town as yet, the newsagent told me, adding that ‘We’re too posh here to have it!’ It was good to have a laugh and the social interaction. No easy answers!
Katharine,
people will lose income during the crisis and consumer spending will fall that is inevitable. Our income is the goods and services we produce. As production falls off so does national income.
Most gross new money creation does not go towards increasing production it goes towards servicing existing debts and obligations – mortgages, rents, car and personal loan repayments. As loans are repaid money is destroyed so net money creation is lower. Government support is targeted at keeping businesses (and banks) afloat and maintaining subsistence incomes for daily living.
There was a prescient article in the FT a couple of years back about lessons learned from the financial crisis https://www.ft.com/content/543359aa-8d0d-11e7-a352-e46f43c5825d
“One of the inescapable truths of the past 10 years is that the central bank policies introduced to mitigate the crisis may be sowing the seeds of another one….investors are seeking “yield” wherever they can find it, pushing up the value of a range of investments. So-called asset bubbles are everywhere as a result.”
“The UK’s housing market, particularly in the south-east of England, is one of the most obvious. With London house prices now at 14 times average earnings, up from a long-term norm of eight times, experts say the only question is when and how the bubble bursts, not if. “As real interest rates return to normal, asset prices are bound to fall relative to incomes,” says Lord King. “In the UK, we have to see a sharp slowing of consumption and a switch to exports and investment. That has to happen either through higher taxes or higher interest rates. But something will have to happen in order to encourage us to spend less. Asset prices will deflate one way or another.”
Paying rent is one of the biggest immediate problems for those not in council housing or receiving housing and other benefits. Lloyd George speaking at Aberdeen in 1912 said:
“Search out every problem, look into these questions thoroughly, and the more thoroughly you look into them you will find that the land is at the root of most of them. Housing, wages, food, health…”
@ Joe B,
” Our income is the goods and services we produce.”
No. It isn’t. It’s the goods and services which are produced and sold.
That’s why it’s essential that Govt fine tunes the economy, by regulating aggregate demand. Manufacturers will then have more confidence that the goods and services they do produce will be sold. Having said that, they still have to produce the right goods and services. There can’t be any guarantee that poor quality goods will be sold.
“As loans are repaid money is destroyed ”
Is it? If the bank lends a potential buyer £1200 to buy something, say a second hand car, privately then assets and liabilities sum to zero, in the Private Domestic Sector, before the loan is issued, after the sale is made, and after the loan is repaid. On the other hand, if that £1200 is used to buy something new which is subject to 20% VAT then they don’t sum to zero. The PDS is left with a net negative balance of £200 after the Govt has taken its cut.
Therefore it’s taxation which is the “money destroyer”. That, indeed, is the very purpose of taxation.
Peter Martin,
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders. That includes goods produced and held as unsold inventories in any given period.
In macroeconomic terms, extending bank credit leads, by accounting necessity, to money creation. But whether there is still more money in circulation at the end of the day depends entirely on what is done with the money. When a bank grants a mortgage it creates a deposit that is transfered from the buyer into the seller’s account. Typicaly, the seller will immediately use the money to pay off his or her own mortgage. And this is the same as destroying money. In net terms, money is only created at the end of the day if the mortgage being redeemed by the house vendor is lower than the mortgage taken out by the buyer.
In practice, the majority of loans are used to redeem other loans. This applies to mortgages (both in the case of new purchases and the refinancing of existing mortgages), but also, for example, to business credit which is “rolled over”
Joseph, you wrote to me, “People will lose income during the crisis … that is inevitable.” I should have thought it was our duty as Liberal Democrats to insist to the Chancellor that he should ensure that the poorest people, whether employed or not, do NOT lose income.
As to the rest of your comment there, you know that I cannot enter into the economic arguments between you and Peter Martin, and the remarks of Lord King are thus unfortunately lost on me. I did notice only one sentence particularly – “But something will have to happen i order to encourage us to spend less.” No doubt I am missing the context, but I was certainly under the impression that generally we should be encouraged to spend more, in order to boost industrial production and government tax intake. At any rate our poorest fellow-citizens are likely to have no option but to decline to spend less, because they haven’t got any money, and only to wish they could indeed spend more.
@ JoeB
If the Goods and Services aren’t sold, how can a market value be established? I could produce what I might think is a work of art worth £1 million. So does GDP go up by £1 million even if no-one is silly enough to buy it? No. Of course it doesn’t.
GDP = C + I + G + (X-M)
Where C is the spending on consumption, I is the spending on investment, G is Government spending , and X and M is the spending on exports and imports.
If things are sold they don’t count as GDP. Period.
https://en.wikipedia.org/wiki/Sectoral_balances
” I was certainly under the impression that generally we should be encouraged to spend more, in order to boost industrial production and government tax intake.”
Absolutely. When the Coalition first came in and announced a figure for the welfare cuts, as Convenor of Social Care I commissioned a report on the impact on the Scottish Borders economy. Putting the human cost on one side it took £ 10 million out of the local economy…. to everybody’s cost.
@ Joe B, @ Katharine,
Katharine is quite right when she says: “our poorest fellow-citizens are likely to have no option but to decline to spend less, because they haven’t got any money, and only to wish they could indeed spend more.”
Having said that Joe is right to some extent too when he says that as production falls there will be supply side effects on the economy. Therefore it’s not as simple as saying that the Government needs to exercise its fiscal powers to boost aggregate demand. If there’s less supply than previously extra demand could simply stoke inflation.
So the Government does need a careful and measured response to avoid that. I wouldn’t be averse to bringing back a form of rationing to go alongside increased social spending. Empty properties could be compulsory requisitioned for the duration of the emergency to house the homeless. It could be made illegal for supermarkets to throw away food rather than give it to foodbanks. All the usual wartime measures, essentially, to keep everyone going and stop some from taking more than they need.
Peter Martin,
this is the definition of GDP https://www.investopedia.com/terms/g/gdp.asp. “GDP includes all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade (exports are added, imports are subtracted).”
Inventories are valued at the cost of production.
This statement is incorrect “If things are [not] sold they don’t count as GDP. Period.”
Katharine,
Lord King is advocating less spending on consumption (which has become increasingly dominated by imported goods) and more spending on investment with a greater focus on domestic production and exports to narrow the deficit in traded goods. To some extent this has started to happen with supplies of consumer goods from China being cut-off and domestically produced products taking their place during the coronavirus outbreak.
Peter Martin,
ypu have provided a link to the wikipedia entry for sectoral balances above. GDP accounts measure the flow of production (how much was produced during some period of time), and the flow of how much was then sold (e.g. for consumption or investment), inventories are a stock, and it is the change in the stock of inventories that enters into the GDP accounts. GDP is the flow of goods and services produced in the economy, and these goods and services are then sold for various purposes, including private consumption, private fixed investment, government consumption and investment, and exports, with imports also a supply of goods that can be sold. But goods produced in some period will not necessarily match goods sold in that same period. The difference is accounted for by either a rise or a fall in inventories. Hence the change in the stock of inventories, when added to final sales (with imports entering as a negative), will equal total goods and services produced, which is GDP.
Joe Bourke – “Lord King is advocating less spending on consumption (which has become increasingly dominated by imported goods) and more spending on investment with a greater focus on domestic production and exports to narrow the deficit in traded goods. To some extent this has started to happen with supplies of consumer goods from China being cut-off and domestically produced products taking their place during the coronavirus outbreak.” – and we should call for total mobilization of industry and resources to raise production of medical supplies, equipment and other necessities, and to modernize factories via automation as well, like what we did during the World War. Converting the current market economy into a wartime economy is also a good way to stave off economic collapse.
Thomas,
How likely do you think it would be that this Conservative government would impose the conditions you suggest for their bailout to companies?
Joe Bourke,
It is not inevitable that people will lose income during this crisis. The government could take action to ensure no one loses any income. However, I think the government would find it difficult to pay benefits at the net income a person received last month. That is why I am calling for benefits to be raised to the poverty level.
Peter Martin,
Indeed, in the current crisis with people self-isolating and businesses being shut there will be a reduction in the amount being produced, but there is still a need to keep aggregate demand high enough so that things still being produced are purchased.
Katharine and David Raw
”I was certainly under the impression that generally we should be encouraged to spend more, in order to boost industrial production and government tax intake.”
I hope that Joe Bourke and Mervyn King understand that it is a bad thing for aggregate demand to fall, even if the coalition government didn’t understand that trying to cut the deficit would reduce aggregate demand and nearly brought us to a double-dip recession (2011/12).
@ JoeB,
The investopedia link you provided gives exactly the same spending based formula I used. It goes on to say ” . The U.S. GDP is primarily measured based on the expenditure approach.” And rightly so.
Right wing supply side neoliberal economists (such as yourself?) like to make the argument that production is an equally valid way to measure GDP because they don’t like the idea that Government has a responsibility to match aggregate demand to productive capacity. They tend to say things like “Hence the change in the stock of inventories)…..will equal total goods and services produced, which is GDP.” The assumption is that everything that is made gets eventually sold at the inventory pricing and is put to good use.
This may work for a company manufacturing tins of baked beans. If the company overproduces in one month it can cut back production the next month. There’s no point having warehouses full of product which isn’t selling. But it doesn’t work for lots of companies which have a limited time to sell their production. Loaves go stale. Sausages have a sell by date. Mobile phones which are desirable one year become second hand items the next as the technology improves.
In short, the assumption that production = sales is a not a good assumption at all.
@ Michael BG,
“…there is still a need to keep aggregate demand high enough so that things still being produced are purchased.”
Yes. In the current circumstances when decisions need to be taken quickly it is better to err on the side of the Government overdoing its spending. So what if it means that inflation rises to 5% or even 10%? We’ve had higher than this before and survived to tell the tale!
Peter Martin,
when inventories are produced spending occurs on materials and labour costs. This is the spending side of GDP. The income side is the payments made to suppliers for materials and labour.
Michael BG,
when production of goods and services fall so too does national income. The government can’t make that up. All it can do is borrow to protect some of the most vulnerable.
The government has been subsidising low pay and part-time work ever since working tax credits were brought in by Blair/Brown. The system was copies from the earned income tax credit system that has been used in the US since the late 1980s. EITC is a system for allowing benefit claimants to escape the poverty traps so that partial benefits can still be claimed. The working tax credit (now Universal credit) allows employers to hire workers on minimum wages and on zero contract hours as workers can have their pay supplemented by benefits. It is these benefits that will be used to partially lost income now.
@ Joe,
No company wants to run up its inventory unless it is very sure of selling it without slashing its prices. Consequently most companies are able to produce much more than they do if the demand was there. You don’t seem at all keen to acknowledge the importance of paying customers.
What we are actually discussing is known as Say’s Law. The idea is that production of a product creates a demand for the product. This is still familiar theme with right wing economists. More enlightened economists think it should have been abandoned at least at the time of the Great Depression.
But this isn’t going to help very much at the moment. The government should just do what it takes to get us through the next six months or so. We know we can live with a debt to GDP ratio of 150% or greater because we’ve done that before. We don’t know if we can live with the effects of the CV.
https://en.wikipedia.org/wiki/Say%27s_law.
Peter,
we are not discussing Say’s law we are discussing how GDP is calculated. It includes spending on the cost of producing inventories. This is just a simple fact known to any economist or statistician. It is the change in the stock of inventories that enters into the GDP accounts. Inventories are monitored closely by government statisticians as a build-up is an early sign of looming recession brought on by firms cutting back on production and reducing working hours to reduce inventories.
Modern supply chains frequently use just-in-time inventory management systems to minimise stockholding, but this is reliant on component suppliers being able to meet tight delivery deadlines which can easily be disrupted as we have just seen with suppliers based in China.
The government will make support available to employers to keep their workforce intact and avoid mass layoffs over the coming months, probably based on subsidising short-time working. All sources of incomes (not just wage incomes) will fall nonetheless. Most Companies will suspend dividend payments as their profits disappear. Commercial and residential rents will go unpaid as will mortgage payments and other supplier payments. Companies with already weak balance sheets will struggle to survive even with wage subsidies.
I agree the government should just do what it takes to get business and individuals through the next six months or so, but fiscal and monetary stimulus will not prevent the fall-off in production and income from a supply-side shock.
@ Joe B,
Yes we are. Your original comment, which didn’t include the term GDP, was that:
” Our income is the goods and services we produce.”
Can only be made by someone who accepts Say’s Flawed Law.
My comment was:
No. It isn’t. It’s the goods and services which are produced and sold .
For example, I could spend time teaching someone Maths. I used to do that in my younger days to earn a bit extra. But if I don’t sell my services, and I have often done it for free, I don’t get an income. By definition. This statement is so obviously true on both a micro and macro level that I can’t see how anyone can possibly object to it.
Peter Martin,
I don’t know how you are at teaching Maths, but you should not try to teach economics. The basic measure of income in any economy is GDP. GDP is a measure of a nation’s output and is measured as the total monetary or market value of all the finished goods and services produced (not sold) within a country’s borders.
It excludes goods and services that are not traded for a monetary value and capital gains on existing assets. It includes the production of finished goods whether they are sold or held in inventory in any given period.
@ JoeB,
If the mainstream was so good at economics we wouldn’t have had the 2008 GFC! The eurozone wouldn’t be in the mess it’s in. So it’s quite apparent they (you?) need a bit of outside help! Even if it’s unpaid so doesn’t count directly towards GDP 🙂
You’ve probably heard the joke that paid sex with a prostitute adds to GDP but sex between willing partners doesn’t. Except it isn’t really a joke. This is how GDP works. The transaction has to be financial to count.
However that may be, Joe/Peter and Michael, it appears that the government is going to ensure that laid-off workers are paid £94 a week, whether on sick pay or on universal credit. That I suppose will not create much demand for the goods and services that we hope will continue to be produced.
Two small thoughts. Why is it always ‘aggregate’ demand, not just demand? And – more importantly – I hope our leader will be pressing for all people deprived of anything to live on, including the self-employed, to receive at least this small handout of cash in the immediate future.
Joe Bourke,
You know that I don’t accept your view of the economy. It seems the government agrees with me more than you by saying it will pay 80% of wages up to £30,000 a year. Now the government has to take the same scale of action for the people not covered by that measure. The government can take action to keep aggregate demand at the same rate it was last month, or at some level near to that.
“It is these benefits that will be used to partially lost income now.”
I don’t know what this means.
Peter Martin,
I read somewhere that items produced but not sold are included in ‘I’ Investment
Katharine,
‘Aggregate demand’ is just the total amount of demand in an economy. In economics ‘demand’ is “the quantity of a good that consumers are willing and able to purchase at various prices during a given period of time” (Wikipedia quoting O’sullivan, Arthur, Sheffrin, Steven M (2003) Economics: Principles in Action).
I think Rishi Sunak should have a maths lesson from Peter, because £1000 a year is only £19.23 a week and not either £20.91 (current difference between Universal Credit and Statutory Sick Pay) or £21.26 (the difference between them after 6th April).
Katharine,
Aggregate demand is the sum of consumption expenditure, investment expenditure, government expenditure, and net exports.
GDP can be analysed in terms of the output produced of different industries in the economy, or alternatively by expenditure on goods and services made by households, businesses and the government.
Services are the sector that account for the largest part of the economy – 80% of economic output; the production sector 14%; construction 6% and agriculture 1%.
Household consumption is the largest element of expenditure across the economy, accounting for 63%. Government consumption accounts for 19% and investment for 17%.
A big part of the services sector particularly travel, hospitality and leisure services are closed down.
When you look at average weekly family spending it breaks down as follows:
– Restaurants and hotels £51.30 (8.8%)
– Alcohol, Tobacco and Narcotics £13.00 (2.1%)
– Households spent an average of £76.90 (13.1%)on recreation and culture, including on package holidays, TV and streaming subscriptions, sports, and pets.
– Transport, including the purchase and servicing of vehicles, fuel, and public transport averaged £80.20 per week (13.7%)
– Average spending on housing, fuel and power (excluding mortgages) was £79.40 (13.6%), though when mortgage interest payments are added, this increases to £100.20.
– Food and non-alcoholic drinks £61.90 (10.6%)
– Clothing and footwear £24.40 (4.2%)
– Communication £21.30 (3.6%)
– Household goods and services inc furniture £40.80 (7%)
– Miscellaneous goods and services £45.50 (7.8%)
– Other expenditure items £77.20 (13.2%)
Michael BG,
ypu don’t need to agree with the views and opinions I may express on the economy, but it would be a courtesy if you did not restate an opinion I have expressed as the opposite of what I have said. My opinon remains the same as stated above:
“I would take his [Gordon Browns] advice [for employer wage support]as opposed to trying direct cash payments… I would not, however, rule out anything at this stage including helicopter money on top of wage and job guarantees.”
Joe, thank you for taking the trouble to spell out what average weekly family expenditure involves. When one mentally removes items now probably temporarily unavailable, such as expenditure on recreation and culture, or restaurants and hotels, it still seems unlikely that acceptable modern living can long be prolonged on a weekly handout of around £94.
I think it was the minister Matt Hancock who said he himself couldn’t do it, and to be fair to a Tory, most of us might think the same. But it was their doing, to keep it so low.
Katherine,
the typical modern family is a couple and 1.9 children. There will be a lot of variance in sick pay by company.But where this is £94 per week,for most families they will be receiving child benefit and for those with savings of less than £16k they will be eligible for benefits on top of sick pay and child benefit. It still constitutes a big drop in income and the announcement yesterday that the government will subsidise companies to keep staff employed is an important one.
There will be an inevitable drop in average income as output falls, consumption and business investment spending decreases and saving increases as people start hoarding cash. That will be partially offset by increased government consumption spending and transfer (benefit) payments to support consumer spending. However, GDP will decline (just as it did in the financial crisis) and it is important to ensure that the most vulnerable are protected. We can get by for a few months without going to hotels, restaurants and pubs and flying overseas, but the workers in these businesses need to be supported and the firms kept intact so they can bounce back when the transmission of the virus has subsided.
Yes indeed, Joe, keeping as many workers in jobs as possible should certainly be a major aim of government action, and I like your idea of a job guarantee scheme being promoted along with, I trust you are in favour of, enhanced welfare benefits. Ensuring employment provision is a part of the new national social contract Michael and I are proposing, just as it was part of the Beveridge demand for the post-war contract.
Meantime we must accept as you say a drop in average income, as in GDP – a hard time for everyone, in short. But even with child benefit (which I had not forgotten), the benefit handouts to be extended to many more people in the coming months are not adequate.
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“There will be an inevitable drop in average income as output falls……
We need to be wary of averages. If we have 4 families with incomes of £10k pa and one family with an income of £100k pa, the average income is £28k pa or nearly three times the median or what is typical.
The GDP of the UK works out at about £30k per person p.a. That’s an average which is lot more than most people receive for the same reason. So even if that takes a 20% hit in the next few months, there’s still more than enough to see everyone through the crisis if it is shared out more equitably.
Katharine,
I am in favour of both enhanced welfare benefits for those in need and more progressive taxation for low and middle income earners.
Peter Martin,
We do indeed need to be wary of averages. Life is never so simple. Using your example of 4 families with incomes of £10k pa and one family with an income of £100k pa all living in the same block of flats in London. The 4 families on £10k have their housing costs paid by housing benefit and pay no or very little council tax. The family on £100k bought their ex-council flat for £350k (common in London) and have mortgage payments of £25k a year, £2k in council tax and £12k in car and credit card loan repayments. The high earner is paying a marginal rate of tax of 40%. He puts 15% of his salary into a private pension each year so he is not reliant on the state in old age. After pension payments, tax, mortgage, council tax and loan repayments he has £18k of disposable income. If his boiler breaks down he needs to put another £3k on the credit card to get a new one installed. The council tenants will have this covered in their rents paid by housing benefit. If the cladding has to be replaced to meet fire regulations or other major repairs are required to the building he will have to pay a large service charge as a private leaseholder. The council tenants are covered. If he loses his job he will not be able to meet the mortgage payments and will need to look for affordable accommodation in the private sector (there is none in the private sector in London). The council tenants are in secure accommodation come what may.
Which family is the more secure here? The council tenant or the high earner reliant on a buoyant economy to keep his job?
When Lenin came to power in Soviet Russia one of his first acts was to hang a hundred Kulaks for the crime of having more land than the poorest peasants. https://alphahistory.com/russianrevolution/lenins-hanging-order-kulaks-1918/. This is the Libdems, however, not the Russian Communist Party. We need a little more nuanced policy approach than those employed by the Bolsheviks.
@ Joe B,
You ask:
“Which family is the more secure here?”
OK you’ve convinced me that it’s the council tenants on £10k pa. Just one question: Why don’t all the high flyers, if they are so smart, work in a cafe, on minimum wages, for just long enough to get one for themselves? You’ve made the point “The council tenants are in secure accommodation come what may”, so presumably they won’t be evicted once they revert to a higher paying job.
Peter Martin,
you ask – Why don’t all the high flyers, if they are so smart, work in a cafe, on minimum wages, for just long enough to get one for themselves?
It may have something to do with the fact that cafe’s and restaurants have the highest rate of failure of all business start-ups. According to an Ohio State University study about failed restaurants, 60 percent close or change ownership in the first year of business, with 80 percent closing within the first five years.
If you have put in the effort to acquire the education, training and work experience needed to hold down a high paying job, chances are you are savvy enough to understand the risks involved with a small business start-up. Best to wait until you have made your pile in your mid-fifties or so. Only then think about getting yourself a fancy restaurant in an upmarket part of town where you can entertain your well-heeled former colleagues. If it all goes belly-up you still have a decent retirement pension to fall back on and plenty of spare pots and pans for the home kitchen.
@ Katharine,
You ask why is it always ” Why is it always ‘aggregate’ demand, not just demand?”
Michael BG’s answer is quite right on a technical level but it doesn’t really address the underlying political implication in your question. Yes we want to, or should want to, match up productive capacity with total , or aggregate, demand but also we should have some opinion on just how that demand is divided. We could have the majority of workers on low wages, and so low demand, and still have that match if those with very high incomes make up most of what we are calling “aggregate demand”.
That’s not really the object of the exercise. I’ve got a famous political clause in mind about “full fruits of their labours” but I need to remember this is LibDem website!
Joe Bourke,
Please can you supply sources for your percentages for household consumption, government consumption and investment and what the average family spend their income on?
Your wrote, “when production of goods and services fall so too does national income. The government can’t make that up”. That was the opinion which I was saying the government does not share. The government clearly believes that it can make that up.
If you think I misunderstand your views then you should express them more clearly and not hide them behind long quotations.
I think a person who only receives SSP and has a partner not working and/or children can claim Income Support and Housing Benefit (for their rent), but maybe now they have to claim Universal Credit instead.
Do you recognise that a couple with two children on Universal Credit received only £826.57 a month last month (assuming their first child was born before 6th April 2017) to live on? That is £190.75 a week and the Joseph Rowntree Foundation poverty level for them plus CPI increases is £439.84 a week. Child Benefit for two children is £34.40 a week. There is therefore a shortfall of £214.69 a week. Even with the extra £19.23 a week announced on Friday they have a shortfall of £195.46. It is unlikely that they would receive enough to pay their rent and so they will be using some of their meagre benefit to pay some of the rent. I think there should be no shortfall. Do you agree?
Michael BG,
you comment above “I might assume that you agree with Gordon Brown and think the government should be providing the money for employers to pay their workers and helicopter money should not be used.”
I have replied to your assumption “I would take his [Gordon Browns] advice [for employer wage support]as opposed to trying direct cash payments… I would not, however, rule out anything at this stage including helicopter money on top of wage and job guarantees.” That remains my view.
GDP percentages for household consumption, government consumption and investment are from the HoC Libary report (Match 2020) https://commonslibrary.parliament.uk/research-briefings/sn02787/
Family spending surveys and GDP figures are available from the Office for National statistics https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/bulletins/familyspendingintheuk/april2018tomarch2019
I think that rent payments eating into housing benefits or low earnings is a big problem; particularly for those renting in the private sector and younger homeowners struggling to meet enormous mortgage payments. This is why I keep emphasising the need for land reform to address affordable housing and rents. Land reform coupled with job guarantees are the key elements for reducing absolute and relative poverty. If the minimum income guarantee proposals were adopted your couple above would have another £200+ per week of income with just one of then taking up an offer of a job guarantee and not lose any benefits.