A winter chill swept through the markets and the economy last week. The package of support from Rishi Sunak announced on Thursday will do quite a lot to protect jobs and keep struggling businesses going a little longer.
But if the pubs and restaurants have to shut, and more of our cities, including London, get locked down again, then no amount of Government money will trigger a sustained expansion.
We have very little feeling for how the economy will develop in the weeks ahead. We have had a decent bounce off the bottom and until the past few days it looked as though the autumn would see sustained growth.
Looking ahead: The package of support from Rishi Sunak will do quite a lot to protect jobs and keep struggling businesses going a little longer
Now some sort of fallback in October seems likely, and as for the big consumer spending months of November and December – well, who knows?
What we do know is that the bill for all this will push the national debt to more than 100 per cent of GDP. It was 80 per cent when we went into all this, and it looked as though it would end up between 90 per cent and 100 per cent of GDP by the mid-2020s when normality had returned.
Now it is going to be bigger, and it is small comfort that nearly all the governments of the developed world are in the same boat.
If you want a frame of reference, the blow to public finances is likely to be a bit larger than the damage from the financial crisis of 2008 and the subsequent recession in 2009/10.
That was followed by a near decade of tax rises and compressed public spending. It is not simply a depressing prospect to have to do all that again. Actually, we can’t do it again, partly because it is not politically possible but more because it would not work.
Tax rises of any significant amount would clobber the economy. True, there is public support for increasing taxes on the rich and on companies.
But the really rich – like Sir Jim Ratcliffe – clear off to Monaco, and the moderately rich cut back on their spending. As for companies, tax them much more and they might find they did not need to employ quite so many people. The Government could crank a bit more out of the tax system – but not much.
As for cutting spending, it had already been savaged ahead of the present emergency, so the underlying levels of public spending were already tight. Just getting back to ‘normal’ spending will be very tough. Cutting beyond that base level is not going to happen.
So what will happen? It is pretty clear that the Government will try to inflate away the real value of the debt. It will hold interest rates down for years and hope that inflation returns.
A decade of inflation averaging 2 per cent, as per the official target, and interest on public debt averaging 0.5 per cent gets you quite a long way – on Friday the yield on ten-year gilts was only 0.2 per cent. Holding interest rates below inflation was the main way we paid for the Second World War.
But stealing from savers will not be popular, and in any case if inflation rises then interest rates will inevitably be pulled up too – as they were in the 1970s and 1980s. Mercifully, there is one other way out. It is to crank economic growth back to the underlying long-term rate of 2.25 to 2.5 per cent.
Governments cannot create growth by pulling policy levers. They tried industrial policy in the 1960s and 1970s and the taxpayers ended up with British Leyland. Unsurprisingly, industrial policy got a bad name. But memories fade. Back in July they put $500million into OneWeb, a bankrupt satellite operator, despite being warned by a senior civil servant that taxpayers might lose the lot. Picking winners is a tricky task.
Instead they should create conditions for growth. This does include support for scientific research: think Oxford and the AstraZeneca race for a vaccine.
It can include taxpayer subsidies: think Eat Out to Help Out, an expensive but effective way of supporting the hospitality sector in an emergency.
But most of all it means avoiding silly bureaucratic regulations that inhibit growth. Of course, there has to be order, but post-Brexit the country has an opportunity to comb though regulations that are imposed on business and make a sensible assessment of how they can be adjusted, eliminated or improved.
The Bank of England has already set to work and should be a beacon of orderly common sense. This rather disorderly Government can learn from it.