'Long COVID-19' hits the U.K. economy harder than most other countries
The unmatched spike in public debt, the 1.2 million extra people on sickness benefits, the record postwar tax burden, the bulging size of the state and — above all — weak economic growth are the lasting symptoms of decisions taken during the pandemic. But some of the harm was purely accidental.
"I will be honest, this was a mistake,' says Tim Leunig, referring to the size of the £70 billion ($93.2 billion) furlough program he designed to protect people's jobs and income after the country shut down in March 2020.
Leunig, the chancellor's chief economic adviser at the time, thought he'd been clear about his Coronavirus Job Retention Scheme. It would cover as much as 80% of the average monthly salary, then £2,500. In other words, the payment was meant to be capped at £2,000 a month.
But officials misread his draft to mean a £2,500 limit. "We were absolutely exhausted, as you can imagine. We'd be working through the night. I thought we were agreeing £2,500 and people would get 80% of that — £2,000. And then we announced it, and I went; 'Whoa, what's happened?''
The bailout state
What happened, beyond a couple of billion pounds spent on an administrative blunder, was that COVID-19 changed people's perception of the role of the state. A government analysis in 2023 estimated £373 billion was spent on the pandemic, 13% of national output, the biggest rescue package since World War II and behind only the U.S. Of that, £90 billion went to health and over double, £190 billion, on households and businesses.
The state's traditional safety net became a hammock, bailing out "anything and everything,' Leunig acknowledged in an interview.
Even Liz Truss, who survived just seven weeks as prime minister in 2022, planned to spend £200 billion rescuing households in the energy crisis — despite declaring herself a small-statist.
Much of today's political and economic torpor can be traced to those two years of COVID-19, Leunig believes. However you cut it, and even if factors such as the formal separation from the European Union in January 2021 played a part, Britain has fared worse since the pandemic than peers.
No advanced country bar Spain saw a sharper rise in the debt burden between 2019 and 2022 than the U.K. By 2024, Britain was out in front, with the biggest increase in net debt to GDP of all 33 advanced nations assessed by the International Monetary Fund. It was not inevitable. Denmark, Portugal and the Netherlands reduced their debt.
Most countries found people were keener to work after the pandemic. Uniquely in the Group of Seven, participation fell in the U.K. as over a million people dropped on to health and disability benefits, costing £13 billion a year. Yet a House of Lords report found no evidence of worsening health in the population as a whole.
"It does appear' that COVID-19 provided a training ground for people to claim welfare to prop up their incomes, Leunig says. "Sickness benefits are more generous than out-of-work benefits, so everybody wants to appear to be sick.' Productivity, the wellspring of living standards, crashed and GDP per head has yet to recover to pre-pandemic levels.
Toxic legacy
Britain's swollen national debt, high interest rates, rising benefit bill and lackluster growth have left a toxic legacy: a historic postwar tax burden and crumbling public services, as debt interest cannibalizes departmental budgets. It is no accident that dissatisfaction with the National Health Service is worse than it's been since the British Social Attitudes survey began in 1983.
This new social contract, that the taxpayer pays more for less, is arguably what's driving voters to Nigel Farage's populist Reform party, which polling shows would top an election today. COVID-19's fingerprints are all over this economic decay.
What grates most for Leunig is that, almost three years since the U.K. launched its COVID-19 inquiry, there is still no formal assessment of the economic response or any comprehensive cross-country comparison. Were nations with loose lockdowns like Sweden right? Should schools have closed? Britain's health outcomes are hardly an endorsement and are worse than Sweden, Germany, France and Spain.
Commuters travel on the subway amid the COVID-19 pandemic, in London in January 2022. |
Reuters
The inquiry has published one report on the U.K.'s resilience and preparedness, but nothing conclusive on the nine other "modules.' Former Prime Minister Rishi Sunak, who was chancellor of the exchequer in COVID-19 and advised by Leunig, suggested on the BBC's "Political Thinking" podcast in March the government had been too slavish in following the science. "All the decisions we made had trade-offs,' he says. "We should have spoken more openly about them. The broader reflection is, does our political discourse allow enough space for honest conversations?'
The inquiry will stretch into 2026, lasting twice as long as COVID-19 itself, and is projected to cost over £200 million, the most expensive in U.K. history. Leunig is expected to give evidence on the economic interventions at the end of the year. "How much am I going to remember?' he asks. "Memory plays tricks on us.'
COVID-19 waste
Although his furlough program was credited with saving 4 million jobs, Leunig would be more sparing with handouts now. He would lower the salary limit to 70%, £1,750 in 2020, with a 20% contribution by the employer, replicating Germany's Kurzarbeit upon which furlough was based. In all, he estimates it could have been £10 billion cheaper. Other policies were also flawed, leaving aside the £9.9 billion written-off on personal protective equipment. Altogether, Leunig identifies £50 billion of savings, a quarter of the economic response and about 2% of GDP.
He blasts the £30 billion Self-Employment Income Support Scheme, which perversely lifted claimants' income "above pre-pandemic levels' on average, the National Audit Office found. On the fraud-ridden £45 billion small business "bounce back' loan program, "I'm willing to see more firms go to the wall,' he says. There is "a special place in hell for capitalists who undermine capitalism,' he added about big businesses that kept hold of government support even as their sales rose.
Perhaps most intriguing is the behavioral impact furlough may have had. Clare Lombardelli, the Bank of England deputy governor, has speculated that bailouts may be partly to blame for the weak recovery. The official government analysis is that furlough prevented economic "scarring' by keeping people tied to their jobs, preventing "hysteresis' where the long-term unemployed end up on the scrap heap.
However, Jason Furman, former chair of U.S. President Barack Obama's Council of Economic Advisers, argued at a Resolution Foundation think tank event in April that furlough may instead have killed the dynamism that drives growth.
"We had much more separation from jobs in the U.S. but productivity was better — and it might have been better because of that separation, not despite that separation,' Furman said.
Lombardelli, at the same event, responded: "Does this mean we should rethink hysteresis? I think it does.'
Leunig is skeptical but he and Lombardelli agree that too many questions remain unanswered. Lombardelli, a Treasury colleague of Leunig's during COVID-19, called on researchers to look into the furlough conundrum. Leunig wants clarity on how best to tackle the next pandemic.
For many, the pandemic's legacy is personal. But it is personal economically, too, in the damage to living standards and public services. Leunig is impatient for answers.
"The inquiry seems too parochial,' he says, "and it's taking forever.'
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