Whither the economists while the economy withers under COVID19 lockdown?

With the release of the details of the make-up of the groups advising the government over the lockdown, it is now clear there is a sincere lack of economic expertise as our financial future teeters on the brink. The Adam Smith Institute’s Matt Kilcoyne calls on the government to engage now with economists:

“SAGE includes epidemiologists, psychologists, statisticians, environmental and adolescent scientists, sociologists, and hygiene experts. It does not, however, include a single macro or micro-economist.

“The lockdown is having a huge impact on our lives and livelihoods. Our wellbeing is intrinsically linked to our economic prosperity. Millions of jobs are on the line. Thousands of businesses are on the verge of collapse.

“It is essential that Government policy is based on a wide array of perspectives — but to exclude mainstream economics is a blindspot of exceptional proportions. It leaves gaps in ideas and solutions at a time when we cannot afford any mistakes to be made.” 

For further comment or to arrange an interview, please contact him on 07904099599 or email matt@adamsmith.org

Young hit hardest by lockdown, want tax cuts

The Adam Smith Institute commissioned Survation between 15th - 16th April 2020  to undertake a nationally representative online poll of 1,001 UK adults (margin of error +-3.1%) to investigate the financial impact of the lockdown, views on developing an economic recovery and lockdown exit plan, and tax policy after the lockdown. Five questions relating to the economy and people's personal finances during the lockdown were asked:

1. During the COVID-19 crisis, the UK government has issued a lockdown which has reduced business activity. To what extent, if at all, are you concerned about the impact of the lockdown on the economy?

2. Which of the following statements applies to you?

3. Which of the following statements reflects your view?

4. To what extent would you support or oppose the UK government developing a plan to reboot the economy and exit the lockdown once medical authorities deem it safe to do so?

5. To what extent would you support or oppose the UK government reducing taxes after lockdown ends to try and increase economic growth and jobs?

Nine-in-ten (89%) of respondents said they were concerned about the economic impact, compared to just 1-in-10 (9%) who are not.

A growing number of people are feeling the financial impact of the lockdown. Younger cohorts are most affected than older ones. Londoners are more impacted than the rest of the country.

Two-in-five respondents (41%) expressed concern that the lockdown is having a negative personal impact, compared to just over half (52%) who stated that it is having no negative impact. 

This reflects an increase over time when compared to other polls, indicating that the economic impact of the crisis is growing over time.

Seven-in-ten (70%) of those over-65 report that the lockdown is not having a negative impact on their finances. In contrast, half of those under the age of 54  (49%) are experiencing a negative financial impact of the lockdown. 

There is broad, cross sectional public support for developing an economic recovery plan and lockdown exit plan once medical authorities deem it safe to do so — and there are concerns the Government is not doing enough to develop this plan.

Almost nine-in-ten respondents (86%) expressed support for developing an economic recovery and exit plan, compared to just 2% who disagreed. Conservative voters were the most likely to ‘strongly support’ an economic recovery and exit plan (61%), compared to under half of Labour and Liberal Democrat voters (47%).

More people believe that the UK government has not done enough (42%) to develop an economic recovery and exit plan compared to those who think the Government has done enough (34%). While previous polls have shown that the public is very supportive of the lockdown, this support appears to some extent to be conditional on a broad belief that there needs to be an exit plan to the lockdown.

There is popular support for reducing taxes after the lockdown to help boost the economy and jobs. Younger cohorts are the most supportive of tax cuts after the lockdown. Almost three-quarters of respondents (72%) think that the Government should reduce taxes after the lockdown to try to increase economic growth and jobs, while fewer than one-in-ten (8%) disagree with reducing taxes.

Of those aged 18-34, two-in-five (44%) “strongly support” lower taxes after the lockdown, compared to just one-third (33%) of those over the age of 65.
These results present the need for greater involvement of economic expertise in the Government’s decision making. 

The Government should take action to ensure economic expertise is at the forefront of analysis in the same way as scientific analysis as the next steps are planned, the think tank argues and recommends an Economic Advisory Group for Emergencies (EAGE) is set up to advise on the withdrawal of the lockdown and appropriate measures to reboot the economy. This should operate in a similar fashion, with a similar level of regard and in tandem, to the Scientific Advisory Group for Emergencies (SAGE). 

The think tank recommends that the EAGE could include monetary policy specialists like the former Bank of England Governor Mervyn King, economists like Paul Ormerod whose work has focused on systemic failure in the economy, or regulatory policy experts like Oxford professor George Yarrow. 

The Adam Smith Institute argues that these results show that the public, which has broadly supported the lockdown for clinical reasons, nevertheless is concerned about the economic impact, has growing concerns about their personal financial impact, would love to see a plan developed to reboot the economy and exit the lockdown as when is clinically possible.

Economically the impact of the crisis so far has been borne by the young and the private sector, the think tank argues that the results of this polling suggest that groups recognise it is the private sector that will need to be stimulated and are supportive of tax cuts to boost supportive of tax cuts to boost growth and jobs at the conclusion of the lockdown. 

Matt Kilcoyne, Deputy Director of the Adam Smith Institute, said:

"People know that our lockdown is having a huge impact on our economy. They are facing increasing financial hardship, with the young particularly feeling the brunt. And they want an economic recovery and exit plan that includes tax cuts.

"An economic recession seems a certainty, but a depression is avoidable if we develop a plan to get the economy growing again at the end of this lockdown. We need to reduce the cost of business face and the burden of taxation."

Without a plan to reopen the economy there won't be one to reopen

A new paper from the Adam Smith Institute accuses the OBR of downplaying the lasting risks of the ongoing economic shutdown and challenges the government to come up with a plan for after the end of the lockdown.

• The outbreak of a deadly pandemic has necessitated the forced closure of one-third of the economy – causing a sizeable immediate decline in incomes and rise in unemployment.

• The longer the lockdown, the more businesses will run out of cash, lose hope, and shut down. This will cause substantial unemployment – the extent of which may currently be hidden by the ability to furlough employees. 

• The OBR’s scenarios are underestimating the network effect of the economy and the risk of systemic economic decline if lockdown is sustained. 

• The UK is behind countries across Europe including Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic in developing a plan to exit lockdown.

• ‘Lives versus livelihoods’ is a false dichotomy — a strong economy is what keeps people fed, housed, and ensures we can afford quality health services.

• The UK should remove barriers to investment, reduce taxes on employers, cut corporation tax, reduce the burden of red tape, and remove transaction taxes to boost the private economy after the lockdown. 

The outbreak of a deadly pandemic has necessitated the forced closure of one-third of the economy – causing a sizeable immediate decline in incomes and rise in unemployment. The Adam Smith Institute argues that if we’re to lessen the damage to people’s lives and livelihoods, the UK government needs to develop a plan for the phased end of the lockdown to implement when medically sensible. 

There is broad consensus on the negative immediate economic hit from the lockdown, and support for the government’s public health oriented aims.The free market think tank argues, however, that analysts such as the Office for Budget Responsibility who have “assume[d] no lasting economic hit,” have significantly underestimated the damage being done to firms. They argue that the challenge of reanimating the economy after the lockdown has not been fully understood because of the interconnected nature of the economy.

Ordinary people looking to their own finances, jobs, and businesses take quite a different view. According to a recent YouGov poll: just 11% think the economy will bounce back quite quickly, 42% say it will be worsened for a few years and a further 41% say the economic damage will be much more long term.

The impact of the lockdown grows deeper and faster over time, with each business that closes causing knock-on issues for their staff, suppliers and customers, shareholders and creditors. The more businesses that fail, the more in turn come at risk and pass their risk onto others — just like how a virus can multiply through a population. 

High profile businesses like Debenhams, Laura Ashley, and Flybe that have already called in administrators will be the tip of the iceberg, says the think tank, as it warns that these businesses will pass on disruption to other companies integrated into their offer to clients or reliant on their custom.

The longer that a lockdown goes on, combined with the slow rollout of emergency grants and commercial loans, the more businesses will run out of cash and be forced to close. The country’s 5.9 million small and medium firms are most at risk. The British Chamber of Commerce has found that a majority (57%) of businesses have three months or less in cash reserves, while 6% of firms have already run out of cash. Unsurprising when we think just £8.7billion of the £330bn in emergency loans announced by government have been paid out.

A phased plan would allow companies to assess the feasibility of their operations and calculate the worth of borrowing; the longer lockdown continues, the less feasible an option this is. The greater the systemic loss of industry and mass unemployment, the deeper the risk of depression and the harder any economic recovery will be. 

The Adam Smith Institute’s challenge for a phased plan to end the lockdown comes in the wake of a similar call by the Labour Leader Keir Starmer. An open and transparent exit plan is more likely to ensure a broad public and that measures, such as strict social distancing, can be maintained for as long as is necessary. 

The ASI are also calling for the reopening strategy to focus on how to ensure the return of jobs and growth, by removing unnecessary barriers and excessive state involvement in the economy. 

If the Government wants to safeguard the people’s lives and livelihoods they must, the think tank argues:

1. develop, and release, a phased plan for lifting the lockdown to provide greater confidence for businesses and citizens:

   • following the best possible public health research and latest evidence;

   • explicitly aiming to prevent subsequent mass outbreaks and loss of life;

   • including a strategy for decentralised mass testing, and isolation and tracing of cases while protecting privacy;

   • encouraging physical distancing, maintaining limits on mass gatherings and special measures for at-risk groups in early stages;

   • allowing as many businesses as possible, as quickly as possible, to reopen their operations;

2. scale back the state's extensive role in the economy after the crisis to avoid crowding out the rebooting of the private sector; and

3. introduce policies, both permanent and temporary, that will enable the economy to bounce back after the crisis, including cutting excessive red tape and taxes that discourage investment.

The think tank stresses that the government should only begin lifting the lockdown following the advice of clinicians that the outbreak is under control. However they argue that the clinical priorities need to be set and stated much more clearly: not only so that people know why the economic pain must be endured, but to allow debate on how much economic pain should be endured in return for the clinical benefits.

Countries across Europe including: Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic have announced reopening strategies and even timelines; Britain is falling behind and businesses are being held back from planning at the most crucial moment. 

Dr Eamonn Butler, Director of the Adam Smith Institute and co-author of the report, said:

“The dislocation that is ripping through the economy because of lockdown is like the virus ripping through the population. Each business failure produces many more, just as each infected person infects many more. Unless you get to grips with it fast, things soon escalate out of control. Business failures, bankruptcies and unemployment rocket. So we have to lay plans for how we are going to unwind the lockdown, and do it now.”

Matthew Lesh, Head of Research at the Adam Smith Institute and co-author of the report, said:

“The limbo must come to an end. The closure of one-third of the economy has been necessary to slow the spread and protect the health service — but it cannot last forever. We need a route out of this mess: a strategy to protect from this virus while allowing life to progressively return to normal. This will mean testing and tracing capabilities ramped up, maintaining physical distance in shared spaces, but allowing as many businesses as possible, as quickly as possible, to reopen their operations.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Tone-deaf timing on HS2

Following the utterly tone-deaf timing of the government announcing HS2 entering construction phase, Matthew Kilcoyne blasted the wasteful spending and questionable economic benefits of HS2:

"The benefits of HS2 won't just be delayed and overpriced, they'll now likely never arrive. COVID-19 is already undermining the economics of the  project: with faster broadband and new technologies like Zoom fewer people will want to spend hundreds of pounds commuting across the country.

"We've got an economic crisis that's going to cost taxpayers billions. We can’t afford vanity projects like HS2. We need to get back onto a sustainable financial footing.”

For further comment, or to arrange an interview please phone Matthew on 07904099599 or email matt@adamsmith.org

ASI welcomes Hancock COVID-19 testing plan

The Adam Smith Institute, who today released a report calling for companies, universities and charities to be given permission to test for COVID-19 have welcomed Hancock’s remarks.

The ASI’s Head of Research Matthew Lesh said:

“We’ve wasted too much time with an excessively centralised, bureaucratic approach to testing. It’s welcome news that the Government will be allowing the private sector to begin testing. Lives are on the line and this couldn’t come soon enough. We will need both fast-track approval for labs and new tests in order to reach the ambitious 100,000 tests per day target.

“There is no time for usual bureaucratic delays or power grabs. PHE must stop trying to do everything themselves, we need to fast-track approval of companies, universities and charities. Importantly, we should be using every type of machine and every type of reliable test.”

Testing times in this coronavirus crisis

A new report by the Adam Smith Institutes argues that if the UK had followed the USA's CDC in allowing private lab testing, and stopped confirmatory testing at a single site (Colindale) then we could have ramped up testing to the same per capita level as those three countries have done. South Korea has tested four times as many people as the UK, Germany almost three times and the United States now almost twice as many, per capita. 

The UK is now in the bottom quarter of OECD countries for COVID-19 diagnosis testing.Since 16 March, the United Kingdom has just over doubled daily testing capacity. In the same time period, the United States has increased daily testing by a factor of 21.

The free market think tank argues that the UK is failing to make use of the over 600 accredited medical laboratories in the kingdom, of which 474 are NHS, 120 are private, and 12 are PHE and Public Health Wales. As well as the dozens of University labs that are suitable for testing. 

Former Health Secretary Jeremy Hunt reiterates his call for a more co-ordinated and sped up approach, saying:

"A mass community testing plan is challenging but not impossible if we mobilise in the way we have to produce ventilators. That means tapping into every laboratory, every pharmaceutical company and every university in the country without delay."

The Adam Smith Institute believes that the UK Government can meet its testing targets and save lives, if it is able to:

1. Fast-track approval for private sector laboratories to conduct COVID-19 testing;

2. Substantially expand usage of NHS and university laboratories to conduct COVID-19 testing;

3. Undertake rapid approval of private sector developed tests, including mutual recognition of tests approved by other regulatory bodies such as the FDA; 

4. Reduce testing red tape, including the requirement that all initial tests must be retested centrally by PHE; and

5. Explicitly call on companies to help make testing kits and develop lab capacity for COVID-19 testing, modelled on the successful call for businesses to make ventilators.

For further comment, or to arrange an interview with report author Matthew Lesh, please contact Matt Kilcoyne via email (matt@adamsmith.org) or mobile (07904099599).

ASI comments on new housing reforms

The Adam Smith Institute has strongly welcomed the Government's housing reforms announcement by Secretary of State Robert Jenrick today.

The ASI’s Head of Research Matthew Lesh said:

“The Government’s housing reforms will improve the lives of millions by providing access to quality, affordable housing while substantially boosting the economy. They could finally succeed where others have failed: solving the housing crisis.

“The focus on densification, building around stations and on brownfields will make a real difference. The ability to demolish vacant buildings for new developments without lengthy bureaucratic processes will not only reduce antisocial behaviours but also provide more places for people to live.

“These reforms will enable more people to live where they can be most productive and earn the highest incomes while helping reduce commuting and carbon emissions. 

Adam Smith Institute budget comment: 'spending like drunken sailor' won't work

The Adam Smith Institute has raised concerns about today’s big-spending budget. They have called for tax cuts and reform to create the foundations for sustainable growth.

The ASI's Head of Research Matthew Lesh said:

“It is seriously concerning that the Government is looking at ripping up the fiscal rules. A Conservative Government should not implement debunked Keynesian stimulus theories. Some infrastructure and public services spending, as well as supporting individuals and businesses during Covid-19, is necessary.

"But in the longer-run, spending like a drunken sailor will not create a thriving entrepreneurial economy. Expansive vanity projects won’t make us better off. Bureaucrats picking winners does not support risk-taking by entrepreneurs — the Government should be cutting red tape on innovation like limits on biotechnology, not presuming to know what is best.

“The tax burden is already at the highest it has been in forty years. We spend an extraordinary 5 months of the year working for the state before earning for ourselves. We should welcome the increase to the national insurance contribution threshold, the fuel and alcohol duty freezes, and maintaining the Entrepreneurs’ Relief albeit in a scaled-back form. But it is disappointing that the Chancellor has not used this opportunity to take more radical, longer-term steps to reduce the burden of the state and reform taxes. The targeting of environmental bogeymen, like increasing the gas levy and tax on plastic packaging, is not the right approach to environmental concerns — we need a broader approach.

“The structures and buildings allowance increase from 2% to 3% will help stimulate investment, but we need to go further. The Chancellor should remove barriers to investment by fully abolishing the Factory Tax, which holds back spending on buildings and machinery. The business rate review is a welcome opportunity to consider moving to a system that taxes on the basis of land value."

ASI comments on new immigration system proposals

Responding to the Government’s new plans for a post-Brexit immigration system, Daniel Pryor, Head of Programmes at the Adam Smith Institute, said:

“The Government’s post-Brexit immigration proposals represent a welcome shift away from the economically illiterate approach that characterised the May era — but we should be honest, all attempts to end free movement of workers will reduce productivity and growth, and represent a step back to central planning of the economy by Whitehall.

“Salary is not synonymous with skill shortages. Lower, looser salary thresholds will help relieve some pressure on businesses: although ideally they should be scrapped. Quadrupling the seasonal agricultural work scheme will help British farmers and introducing a route for highly skilled workers without a job offer removes expensive, bureaucratic hassle that stands in the way of attracting top international talent.

“There are still major issues. Around 70% of EEA citizens who arrived in the UK since 2004 would likely be ineligible for the most common visas under the new system. These people have massively contributed to the economic and cultural life of the UK—and concerns about future skill shortages remain paramount. This is especially true for regions like Scotland that rely on EEA workers for key industries like health and social care. The Government embraces market forces when it comes to the free trade debate, but they're still struggling to extend that logic to immigration.”

Abolish the Factory Tax to level up Britain

A new paper from the neoliberal think tank the Adam Smith Institute says that if the Prime Minister is serious about boosting wages and levelling up; then he needs to Abolish the Factory Tax. 

• The UK has had the lowest level of private investment in fixed capital as a share of GDP in the G7 for over two decades 

• Abolishing the Factory Tax by allowing businesses to immediately write-off capital expenditures, would boost investment by 8.1%

• Annual rate of growth in output per hour since the financial crisis has been 0.3%. Abolishing the factory tax would boost labour productivity by 3.54%, the equivalent of £2,214 per worker, in the long run

• UK is currently ranked 33rd (out of 36) in the OECD on the Tax Foundation’s Capital Cost Recovery index

• The Factory tax accelerates deindustrialisation and holds back growth in parts of the country that are relatively more dependent on manufacturing, including the North and Midlands 

In the Prime Minister’s first speech to Parliament after winning the leadership of the parliamentary Conservative Party, Boris Johnson made boosting the productivity right across the country a central pillar of agenda. In the upcoming Budget, the Adam Smith Institute argues that new Chancellor Rishi Sunak should commit to Abolish the Factory Tax.

The Factory Tax is the inability to fully expense investments in machinery and buildings — that encourages low-capital intensive knowledge economy businesses in the South East and London over high-capital intensive businesses in the Midlands and North that need to invest in long-run assets.

At the heart of the UK’s recent productivity issues, the authors argue, is a lack of investment. Every year since 1998, the UK has had the lowest level of private investment in fixed capital as a share of GDP in the G7. This low level of investment has contributed to the rapid downfall of the UK’s manufacturing sector, which has declined by more than any other G7 nation. 

The UK’s tax treatment of capital investment is in effect a Factory Tax, the free market think tank argues. According to the Tax Foundation’s Cost of Capital Recovery index, the discounted value of the deduction for plants and machinery in the UK is just 75.6% of its total cost. As the costs of capital investment, unlike other costs, cannot be fully recovered capital-intensive businesses are penalised. 

The think tank says the tax system should not discriminate between day-to-day spending and long-term investment, that it should not favour one form of financing over another (such as debt rather than equity), and that it should be sector-neutral. Investing in capital means not spending today in order to get more in return tomorrow. High taxes on capital discourage saving, and mean taxing consumption at a later date higher than just spending the money now. In the long run this means the lower wages and lower growth the UK has experienced in the past few decades. 

The amount of revenue raised from corporate tax has remained relatively stable despite substantial reductions in the rate over recent decades. This is largely because of decisions to make the system less friendly to investment. 

The UK’s headline corporate tax rate was reduced from 30% to 19% from 2018 to 2017. But the headline rate cut was financed by reductions in the value of capital allowances. The rate at which investments in plants and machinery can written-off has fallen from 25% to 18%. These changes have led to a dramatic fall in the value of investment deduction.

On top of this the fall in the value of the UK’s capital came at a time when “all other G7 countries have seen their present value of capital allowances increase.” In the United States at both a state and federal level the Factory Tax has been reduced in recent years, leading to the conclusion by economist Eric Ohm that full expensing increased investment by 18%. 

The authors set out three recommendations to Abolish the Factory Tax:

1. Allow businesses to immediately deduct capital expenditures on plants and machinery from their taxable income by making the Annual Investment Allowance (AIA) unlimited.

2. Allow businesses to immediately deduct expenditures on non-residential structures and buildings as well.

3. Allow trading losses to be carried forward to compensate for inflation.

Allowing firms to write-off the costs of new investments immediately would unlock 8.1% in additional investment and boost labour productivity by 3.54%, with most of the benefits going to places outside London and the South-East. Abolishing the Factory Tax, the Adam Smith Institute argues ahead of the Budget on March 11th, would help the Prime Minister ensure that the campaign promise to “level up” the economy becomes more than just a slogan.

Sam Dumitriu, Fellow of the Adam Smith Institute and co-author of the report, said:

“Beneath Britain's internationally-competitive Corporation Tax rate lurks one of the most restrictive treatments of investment in productivity-boosting equipment in the OECD. We should follow the lead of Canada and the US and move to a system where businesses can write-off new capital expenses immediately. Ending the Factory Tax would unlock investment and raise productivity in the long-run.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.