THERE are many reasons for the rate of inflation to be growing in the UK – but whatever your political disposition it would be a clear act of self-delusion to deny that lockdowns and accompanying restrictions have not played a substantive part in what we are experiencing.
Today’s announcement that the year-on-year inflation rate for February has increased to 6.2% and according to the Office of Budget responsibility will reach 7.4% this year (I believe it will be double figures) needs to be seen for what it is – we are literally paying the price for lockdowns and the costly policies that were required to make them sustainable.
The Chancellor’s Spring Statement, which I listened to intently, is chiefly irrelevant. The damage has been done, all he can do now is try to ameliorate the symptoms of our collective self-harm. Governments can and always will throw money at problems of their own making and this situation is no different. I shall not use this platform to argue about what more could have been done, that is for other outlets, what I want to emphasise here is that never again should we use lockdowns and restrictive laws to damage the economy like we have done over the last two years. The poorest always suffer the most and inflation will see to it that the poorest pay yet again for the lockdowns.
Have there been other influential factors to the high inflation? The Ukraine War? The failure of the energy price cap? High government taxes? Yes, of course these can be additional factors, but let us first recall where we were two years ago in March 2020 as we adopted lockdowns, initially for a three-week period to “flatten the curve”.
The February 2020 year-on-year inflation rate of the Consumer Price Index (cpi) was 1.7%; UK economic growth was 1.7% – the same as it had been in 2018. The employment rate for 2019 was 76.6% – an all-time high – and unemployment was only 3.74%, effectively what most economists would consider ‘full employment’. In 2019 taxes had already gone up – to a level they had last been at in 1984 – but by the end of the lockdowns the taxes had, according to the Office of Budget Responsibility, risen to a level not seen “since the early 1950s, late in Clement Atlee’s post war Labour Government.”
And no wonder – the UK Government’s deficit (or net borrowing) in the financial year ending 2019 was only £38 billion and coming down, equivalent to 1.8% of GDP – but by 2021 had ballooned over eight-fold to £327.6 billion, equivalent to 15.3% of GDP.
Since 2019 there have been other economic shocks to the system, but none compare with the worldwide disruption of lockdowns and the financial largesse of our government in making our three lockdowns possible.
All events that might restrict supply of goods or services, causing demand to be greater than supply – such as wars or sanctions will put pressure on costs to rise; all government price caps or limitations that have prevented past costs from being passed on will, when eased, put pressure on costs to rise; and, any taxes that are increased in an effort to recover additional spending made to soften the blow of lockdowns will put their own pressure on costs to rise. My point is that had it not trashed our economy the Government would be in a stronger position to weather the storms than it is now.
There is no doubt in my mind what we are witnessing is the high cost of the our and other governments’ pandemic responses now being passed on to consumers – be it through causing shortages that have not yet fully worked their way through the economic cycle, the taxes introduced to recover our government’s subsidies such as furlough payments and business loan write-offs introduced to keep our heavily restricted economy on life support, or the deluge of money hosed at our NHS so it could meet its huge additional costs for PPE, ventilators and other unexpected requirements.
The National Audit Office has estimated additional public spending directly attributable to Covid-19 to May 2021 to be a staggering £372bn as of September 2021. It is now likely to be larger. As economist Ewen Stewart wrote here,
“The Office of National Statistics (ONS) reckons there are 27.8m households in the UK. So, since the start of the pandemic direct Covid-19 spending is equivalent to £13,381 per household to May last year. It will be well over £15k by now – and rising. These sums are mind blowing. To put them in context £13k is not far off half an average employee’s take home pay. £372bn is almost double the £194bn of income tax receipts raised in totality by HMRC in 2019-20. The total sum is four times the entire education budget and eight times the defence budget.”
And remember, despite this extraordinary and unprecedented spending at a time of peace, the opposition parties and many commentators were demanding that lockdowns should have been sooner, longer and often more restrictive. They would, therefore, have also been far more costly.
The pandemic was the largest peacetime economic shock faced by the UK in over 300 years only because of the manner in which the Government and the opposition parties agreed to respond to Covid. The lockdown was initially meant to prepare the NHS for the pandemic (or so we were told) but it then became the default position of how to manage the threat to public health. The economy was sacrificed in the process, without any cost-benefit analysis of how else to overcome the pandemic. Now we face not just the appalling costs to the health of those who were not protected from other life-threatening or life-shortening conditions – but also the massive cost to the economic dislocation too.
To help fund the additional financial commitments the Government ran up not only a massive deficit, it also created money through Quantitative Easing because we were no longer earning money through productive activity. The distortion that has caused and will continue to cause is also a price that will be paid – and in part is seen through the high cost of housing in Britain today. It has also meant the Government’s ability to use interest rates to fight inflation has been severely curtailed.
Whichever way we look, in the next year we will see our cost-of-lockdown-crisis.
Never again, we must say – and that message is to all parties – for none have yet had the cojones to admit they got it wrong; very, very wrong.
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Brian Monteith is a former member of the Scottish and European Parliaments and managing editor of the Time for Recovery blog.