Coronavirus has triggered a global economic shock, with far reaching consequences. Ben Wray argues it is pulverising the economic consensus both around the world and in Scotland.
The Coronavirus outbreak has been the trigger for panic in financial markets that were already slowing down, having been puffed up by a monetary policy induced asset bubble for the past decade that kept rising corporate debts at bay, without resolving any of the fundamental weaknesses of the global economy, most of all stagnant productivity.
Markets have realised that vulnerable companies cannot withstand even a short-term halt to profitability when they have big debts to pay, and thus are pulling their money out of the system.
The airline Flybe, which collapsed at the start of March, is a case in point. Coronavirus was the trigger that suddenly and sharply reduced ticket sales, but it was firing a loaded gun; it’s debts were already unsustainable.
Governments are now scrambling to reassure panicked bankers that they’ll do what it takes to protect the system, while at the same time trying to reassure populations that they are doing what it takes to protect public health. These are inherently contradictory priorities: re-starting global supply chains is about the best possible way to spread a global epidemic into a pandemic.
China’s approach may have been authoritarian, but it did highlight that curbing the local economy was helpful in preventing the virus from spreading. Government tools to boost economic activity always involve encouraging business to do more, but it’s people that end up doing this activity on the ground, and it’s their health which is put at risk.
Italy is at the centre of these contradictions. The country with the second highest Coronavirus cases worldwide also has the second largest debt to GDP ratio in Europe, behind Greece. Yet Italian Prime Minister Giuseppe Conte has announced a lock-down of the whole country and, remarkably, that all mortgage repayments will be halted until further notice. Italian banks – already suspect – could come under financial attack if this move lasts for any length of time and repayments collapse.
The weaknesses of Eurozone macroeconomic governance comes into play here. Unable to act unilaterally, Rome had to “seek authorisation from Brussels to increase the budget deficit this year”, according to the Financial Times. While it is possible that the European Central Bank may authorise co-ordinated suspension of fiscal rules across the whole of the Eurozone to allow government investment to flow, that is by no means definite at this stage. The Coronavirus is hitting Eurozone countries differently, but each capital is not able to respond independently, due to national monetary sovereignty being conceded to Brussels.
The unwillingness of Brussels to break fiscal limits is increasingly at odds with the mood music internationally. Monetary policy has been exhausted by Central Banks which have created a permanent environment of cheap money through ultra low interest rates and ‘Quantitative Easing’. It’s increasingly obvious that if governments wants to accelerate activity, fiscal levers will have to be utilised and the sacred fiscal rules will have to be banished. In other words, this crisis could be the final nail in the coffin of the austerity era.
A new era of spending is the signal the UK Government has been sending out since Boris Johnson came to power. Chancellor Sajid Javid was unceremoniously dumped from government within two months of the election when the Treasury tried to reign in the Prime Minister’s deficit spending. Javid himself had brought in new fiscal rules to replace those of George Osborne, by changing the accounting formula so that capital spending is costed separately from day-to-day spending, meaning new infrastructure does not count towards ‘the deficit’. The new man, Rishi Sunak, is taking this a step further by re-classifying items of spending. Now education, for instance, will count as infrastructure, taking billions out of the day-to-day spending budget and putting it in the capital spending category, to stay within the increasingly pointless fiscal rules.
With the Budget coming on 11 March just as a global slowdown appears to be taking grip, we can expect that the spending taps will be switched on. It’s never been cheaper for the government to accumulate debt. In fact, interest rates on UK Gilts are yielding negative as of Crash Monday. That means investors will actually pay the UK Government to hold its debt. The Tories would be mad not to take this opportunity to expand government investment. The short-term prize is to put the UK in a superior macro-economic position to the Eurozone just as the crunch time comes for the Brexit negotiations. The long-term prize is to strengthen their grip on the new seats they won from Labour in the Midlands and North.
What form will this spending take? There is talk of ‘helicopter money’ – a one-off boost to bank balances, potentially marketed as sick pay – but that’s not likely just yet. It’s more likely that the Tories will seek to boost flagging industry sectors like tourism and aviation through corporate welfare – targeted tax cuts to VAT, for instance. This could be combined with a boost to infrastructure investment which cranks the construction industry into gear. Also, years of austerity have degraded health and social care services to a degree that it is a major electoral liability for the government – expect big funding boosts to the NHS. What’s really needed is to target government investment in ways which fundamentally restructure the economy. Instead of reliance on international flights and mass tourism – one of the few industries to grow substantially in recent years, and which is intrinsically vulnerable to a global slowdown – the likes of Flybe should be allowed to go to the wall, and the workers re-employed on Green New Deal projects, building district heating schemes to decarbonise housing, for example.
There is a latent opportunity in a crisis to shift priorities in ways that build sustainability and durability into the fabric of the economy, not reinforce its worst excesses. This would also be a shift from private to public sector.
Where does Scottish politics fit into this picture? SNP Westminster leader Ian Blackford has argued for corporate welfare for the tourist industry, highlighting a hotel in Skye (his constituency) which has lost thousands from cancelled bookings due to the Coronavirus outbreak. If only Blackford had the same urgency every time a young person had to leave Skye because they can’t afford the rent.
The isle’s reliance on tourism – Skye has one AirBNB for every ten homes – is inherently unsustainable: if workers can’t afford to live there, who is going to feed the tourists and take care of them if they get sick? Knee-jerk corporate welfarism, where the profits are privatised and the costs socialised, is not a serious answer to this crisis.
More broadly, every time there’s a new development in the global economy it seems to highlight the weakness of the SNP’s economic case for independence all the more. The Growth Commission – which argues for Sterlingisation (informal use of the pound sterling); a budget deficit limit of three per cent and an overall government debt limit of 50 per cent of GDP; and a regulatory regime for the financial sector which “mirrors” the City of London – looks like a bigger liability to the independence cause everyday.
First, there’s the very obvious problem of the reality of Brexit. It’s simply not going to be possible for an independent Scotland to have a free-trade zone with both the UK and the EU, as the Growth Commission advocates. This is a contradiction there appears to be no answers to within the limits of what is laid out in the report. If an independent Scotland plums for ‘frictionless’ trade across the UK zone and Sterlingisation – as the GC advocates – it will have to also mirror the UK’s trading relationship with the EU. If an independent Scotland plums for EU membership – as the GC also advocates – using pound sterling is no longer and option and we will have to accept a trading border between Scotland and rUK. An alternative currency plan would also have to be developed, and basically there’s only two options: a Scottish currency from day one, or Eurozone membership. No one at the top levels of the Growth Commission or the Scottish Government seems capable of answering which they would prefer.
Second, the fiscal restrictions in the GC report were proposed at a time when fiscal rules were still all the rage internationally and ‘Osbornomics’ was hegemonic. Now that the Tories have junked those rules and are putting their foot down on the fiscal accelerator, it leaves the GC report well to the right of the Conservative party on total public spending.
Third, while the GC report proposes to take oil tax revenues out of day-to-day spending, there is no plan in the report for the future of the North-East of Scotland after oil and a zero-carbon transition, which is treated (alongside housing) as an issue of second-grade importance to the financial “foundations”. But energy is fundamental to the Scottish economy as a whole, and the North-East in particular. In the context of a collapse in oil prices (crude oil fell 30% on Crash Monday), a post-oil Scottish economy needs to be planned in the here and now. If an independent Scotland is to be a meaningful idea for addressing the problems facing the world, it needs to have an economic case that is also meaningful. The GC report is a proposal for an independent Scotland to fit into the orthodoxies of the global system a decade ago. Crisis has a way of accentuating existing weaknesses – that is as true of the case for Scottish independence as anything else.
Picture: Gerd Altmann