Moving from the hammer to the dance

But some scenarios are more likely than others and it may be wise to be prepared early for them. Forewarned can mean forearmed.

Most forecasters are expecting the tidal wave of Covid-19 infections and related near-global lockdowns to relent later in 2020, but to be followed by a more prolonged economic meltdown. The World Trade Organisation expects a slump in world trade of 30% in 2020, with no return to the growth trend line by the end of 2022, even under their most optimistic scenario, resulting in the worst unemployment since the Great Depression of the 1930s.

What might this mean for Guernsey and what can be done to reduce its impact? We begin ‘the dance'. Tomas Pueyo, writing in Medium, described two distinct phases of the pandemic as ‘the hammer’, when governments move to crush growth of the infection in order to buy time for medical services to cope, and ‘the dance’, in which societies work out how to live with it over the longer term.

This isn’t just about money. It remains about health. Mass unemployment directly drives mental health of those suffering it, and falling government income from tax receipts in a recession directly limit its ability to provide quality health and social services. Both livelihoods and lives are at stake.

So, looking at Guernsey’s specific characteristics, how bad will things get and what can be done to help reduce the miserable impact?

First, some good news. By being both prudent in government and creative in business, Guernsey entered this year of the pandemic in good shape relative to most international jurisdictions. We had relatively high employment, relatively high GDP per head and relatively little government debt. There is every reason to believe that, if we manage this crisis well both in government and the business community, working together, we can also come out of this era of pandemic in a better position relative to most other jurisdictions too.

But now some bad news. We may be an island, but we are not immune to what is happening in the rest of the world. When those large neighbouring economies catch a cold and sneeze, our much smaller economy risks catching pneumonia. We are not immune.

This all prompts at least four questions:

A. Should government intervene?

B. If it should intervene, how and over what timescale?

C. How substantial might any intervention need to be?

D. When and how might any intervention get paid for, say by increased taxes?

A. Should government intervene?

Economists learnt in the 1920s and 1930s that the answer to this question is ‘Yes’ in the circumstances we find ourselves in today. There will always be outlying economists who are at the two extremes, namely ‘the state should own everything’ style of communism, or ‘the state should allow free market capitalism to periodically destroy and rebuild itself’ type of purists. However, most practical economists will argue that:

1. Private enterprise is the most innovative and effective form of business.

2. But there are a few very occasional times when free markets seize up as a result of an extraordinary external shock, or economic heart attack. That is what we are about to experience.

3. As learnt in the 1930s and on occasions since, governments must intervene boldly, because only they have the legal and financial firepower to turn the tide for the whole population.

B. If it should intervene, how and over what timescale?

Early intervention is required in a matter of weeks, not months or years. This is because of the well-known ‘economic multiplier’ effect. If an economy is in a downward spiral following a severe economic shock, such as caused by the near-global virus-related lockdowns, it will continue to build up a downward head of steam. The rate of descent will thereafter be reinforced by the sustained downward pressure.

It is only by early intervention and action that we can reduce the depth of that initial downward spiral and begin to turn it upwards. In recent weeks, you have heard much about the need to ‘flatten the pandemic curve’. Well, we now have a further curve to manage – a U- or V-shaped recession curve of economic inactivity. We need to reduce its depth of descent, flatten it out as fast as possible and then drive that growth and employment curve back upwards. That could easily take us past 2023 to achieve.

C. How substantial might any intervention need to be?

Logic suggests that any intervention to stop a downward economic spiral and create an upward spiral needs to be substantial enough in line with the following criteria:

1. It must be substantial enough to have a sector-wide or economy-wide impact.

2. It must slow and reverse the descent and associated risk of repetitive cuts in investment and jobs.

3. It must breed sufficient confidence in consumers and businesses to spend and invest, rather than cut back everything.

‘It must be substantial enough.’ Does that mean ‘£500m. substantial enough’?

It is currently difficult to say, because we do not know the duration of lockdown, its possible return at some stage in a second phase of virus, or the full scale of impact on the economies of jurisdictions around us (who are also customers for our services).

But we must be adequately forearmed for the economic and liquidity battles ahead. Based on P&R’s preliminary estimates and assessments, £500m. does not seem at all unreasonable. We should secure it and deploy whatever we need of it with great care and economic business insight.

We stress ‘great care and economic business insight’.

Let us be very clear:

1. You don’t work your way out of a recession by spending less. Nor by taxing more.

2. When businesses are on their knees and unemployment is starting to soar, governments must take up the slack and intervene by investing in a portfolio of justifiable public projects to kick-start the economy again. It may defer some projects, but accelerate other projects which provide relatively high work and employment to the local economy.

3. The type of intervention needs to be that which has an ‘economic multiplier’ effect attached and the scale must be substantial enough to create the difference needed. The initial investment creates jobs and income, which is reinvested to create further jobs and income and so on.

4. This will be a huge challenge involving both government and business working in partnership, with all the necessary controls that relate to spending both public money and private money.

D. When and how might any intervention get paid for, say by increased taxes?

This is a very important question, but not one to be addressed in detail today. Today’s primary economic task is to save the economy and the jobs and livelihoods of many islanders. Otherwise, there will be little to tax in future, and many of our social and health services will be unaffordable.

Over the coming months and year or so, we will then continue to need to look at our tax system, revenues, aspirations and priorities. We will need to make capital investments for our island’s infrastructure, which we have not done adequately in recent years. Some of the investments should also shift us further towards a more environmentally sustainable ‘green economy’, so that we too ‘walk the talk’ in support of our Green Finance innovations. And we will have to plan a return to a balanced States budget over the duration of the business cycle, namely five-eight years. Before we do that, every sensible economist will tell you we need to run budget deficits in the near term to finance recovery. We listened to the medical and science experts in the ‘hammer’ phase; we should also listen to the economics and business experts in the ‘dance’ phase.

Conclusion.

In summary:

1. Public and business confidence is critical in driving out of severe recessions. Without such confidence in a substantial, well-managed and well-communicated economic recovery plan, any hoped-for recovery will not gain traction and will fizzle out.

2. Given the scale of economic crisis we face, we should have government and business addressing this jointly in some form of innovative government-business partnership board, backed up by substantial government and business skills and financial firepower.

3. We have to demonstrate and communicate to islanders and key off-island customers that Guernsey is open for business and indeed that ‘Guernsey works’ for all of them.

4. We have to begin this immediately, in days, given that some thinking and proposals on this are already on the table.

Again, to close on a positive note, there is every reason to believe that, if we manage this crisis well both in government and in the business community, working together, we can also come out of this era of pandemic in a better position relative to most other jurisdictions too.

JOHN HOLLIS AND STUART FALLA

Addresses withheld.

Stuart Falla MBE is a chartered director and has a degree in building economics.

John Hollis gained a first-class degree and the economics prize from Bristol University, before a career in international business.