The negative impact of the measures being taken to control the Corona virus look likely to be very severe, and will themselves have profound consequences for public health. While all reasonable measures to save lives should be taken, there is a point beyond which the costs may be judged to be worse than the effects of the virus itself.
The Health Impact of the Virus
Impact of doing nothing
The Government response is largely based on the findings of the Imperial College study . The mathematical modelling suggests that, in a ‘do nothing’ scenario, an estimated 81% of the population would become infected, there would be an additional 510,000 deaths, and the capacity of the health system would be overwhelmed. For comparison, total deaths in 2018 were 616,000 and the increase would represent an increase of more than 80% on the normally expected death toll.
Benefits of a mitigation strategy
The initial HMG strategy focused on mitigation measures: – isolation of suspected cases and home quarantine of those living in the same household, social distancing by the over 70s and others in the high-risk categories.
This approach would reduce the additional mortality to about 258,000, but the capacity of the health system would still be completely overwhelmed. Because the majority of the population would still contract the virus, immunity would build up relatively quickly, and the deaths would be concentrated over a matter of a few months.
The net increase in total mortality might be somewhat lower than this gross estimate to the extent that some of the very vulnerable population would have died in the current year of other causes if they had not contracted the virus, and the public health measures such as frequent hand washing will have a beneficial impact in reducing deaths from other infections.
Impact of measures to Suppress the virus
The unacceptably high death toll even with mitigation measures in place has led HMG to move to more drastic measures aimed at suppressing the virus. The additional measures encompass social distancing for the entire population (not just vulnerable groups) plus school and University closures. These measures have the potential to reduce the total number of deaths to a much lower level, estimates vary according to when the measures are triggered, but the total mortality in most scenarios is expected to be contained below 50,000 deaths.
The further reduction in mortality only occurs if the measures are kept in place until an effective vaccine can be made available. Universal social distancing means that herd immunity has not been built, and the modelling predicts that the epidemic will experience a second peak as soon as the measures are lifted. There may be some options for partially lifting restrictions in some areas, aided by expanded testing and isolation of contacts. However, for suppression to work, the Government assumption in an announcement made on 20th March is that the measures will need to stay in place for at least a year.
Economic Impact of Measures to Suppress the Virus
Reduction in output and incomes, and increase in firm failures
The economic consequences of the epidemic take the form of a severe interruption to the capacity of the global economy to supply goods and services. Some of this is directly the result of the epidemic with workers off sick, but most of it is the consequence of the unprecedented measures being taken to reduce travel and all kinds of social interaction.
Massive Government spending commitments
The reduction in social interaction has profound consequences for output, for incomes, and for the ability of firms of all sizes to survive. Governments around the world are therefore planning to massively increase their expenditure in order to limit the impact on household incomes and prevent the collapse of firms that suddenly find themselves without customers, or unable to produce without breaking the social distancing guidance.
In the UK, measures already announced include £30bn of support in the budget, a further £330bn of loan guarantees announced on 17th March, with further support promised. The loan guarantees alone are equivalent to 15% of GDP. With more to come and with GDP shrinking, the final percentage will be even higher, and is without precedent.
The dangers of ‘Stagflation’
We have become used to very low levels of inflation and of interest rates, but that is about to come to a dramatic end. Stagflation – the combination of a stagnant economy and high inflation – classically takes place when a reduction in supply is not matched by a reduction in demand, resulting in too much money chasing too few goods and services. We last saw it in the 1970s, when OPEC related interruptions to the supply of oil were accompanied by relatively loose monetary policy. What is about to happen globally will be on a rather larger scale.
If the Chinese precedent is any guide, Western economies may face supply reductions of up to 20% of GDP while increasing Government spending by an equivalent amount.
How will Governments finance this increased spending, when their tax revenues are eroded by declining GDP, while their existing spending programmes are already facing increased demands from the health sector, from benefit claims, and from rising costs due to supply interruptions? The Government will have to borrow more.
If it was concerned about inflation targets, the Bank of England would need to make room for the increased Government borrowing by tightening monetary policy in order to reduce the excess demand by squeezing out corporations and households from credit. This would completely defeat the object of the Government spending, by tightening the squeeze on households and firms rather than alleviating it.
If the Bank of England accommodates the excess demand, as it has said that it will, then inflation will be the inevitable result. This will have profound implications for the distribution of wealth and of income. Firms and workers who are able to increase their prices and wages will benefit. Those with less bargaining power will lose, including many of the poorest and most vulnerable.
The most worrying aspect of the situation is that inflation can easily spiral out of control. Government will find that the costs of everything it is trying to do continue to increase as excess demand enables firms and workers to increase their prices and wages. Excess demand will also spill over into an increased balance of payments deficit as Government spending not matched by demand sucks in imports. Loose monetary policy may keep interest rates low in sterling but the excess demand will contribute to pressures on the exchange rate which will further intensify the cost pressures by reducing the sterling value of our exports while raising the cost of imports.
We do not know how much of the money that Government has committed will result in extra spending, nor do we know how severe the impact on the economy will be. However, we can make some assumptions to give an indication of the possible scale of what lies ahead. It is not implausible to envisage that: –
– Additional COVID 19 spending adds £350bn to the Government deficit;
– Government revenue falls by about 10%, adding a further £80bn to the gap
– GDP falls by about 10%
This would result in a sharp increase in the Government deficit to £490bn, or about 24% of GDP, with Government debt increasing in a single year from 80% to over 100% of GDP. This level of deficit clearly could not be sustained for long.
The nightmare scenario would be hyperinflation, of the sort experienced by Germany in the 1920s and more recently by Zimbabwe. Hyperinflation destroys savings and causes untold misery as the currency becomes worthless. I am not saying that this is likely to happen, but it would be reassuring to know that policymakers are alert to the potential risks of such a massive increase in spending beyond our production capacity. I have seen nothing to suggest that they are.
The only way out of a process of accelerating inflation is to end the excess demand, either by the supply of goods and services increasing to close the gap, or by austerity measures to raise revenue and cut spending.
There will be a significant supply bounce back once the epidemic is defeated. We do not yet know when that will be, and it may not be enough. Despite the Government efforts to sustain demand, many firms will be financially a lot weaker, and will be poorly placed to invest in increased output, especially as consumption will also be depressed by the legacy of lost livelihoods and increased indebtedness. The Guardian on 19th March was already reporting that motor industry firms that have closed due to the Coronavirus may not re-open, the virus representing a major additional burden on companies that were already considering their position in the light of BREXIT.
A significant part of the adjustment will therefore need to take the form of harsh cuts in public spending and increases in taxation. That will be politically very difficult, and the risk is that Governments will instead resort to trying to inflate their way out of their difficulties. A prolonged period of recession or slow growth looks probable, possibly accompanied by high and unstable inflation..
Is the cure worse than the disease?
This discussion inevitably prompts the question, is the cure actually worse than the disease? The most severe economic costs are not the result of the disease itself, but of the measures being taken to suppress it.
It is worth contrasting the Coronavirus death toll with estimates of the health consequences of a prolonged recession and associated cuts in health spending. Two studies of the excess mortality experienced by the UK during the years of austerity have estimated the number of excess deaths . The study by UCL estimated an additional 120,000 deaths over the period 2010-2017; a study by IPPR estimated 130,000 preventable deaths over the same period compared to the pre-austerity trend.
Both studies are at pains to point out that causality cannot be proved. However, it is important to also recognise that the likely death toll from Coronavirus under alternative mitigation and suppression strategies is also highly uncertain.
It seems reasonable to assume that UK recovery from the severe recession and budget financing crisis associated with the measures taken to suppress the virus will be both slow and painful. There are ample examples of developing countries facing a decade or more of lost growth as they tried to stabilise their economies after debt and deficit problems of similar magnitude. It seems plausible to assume that such a prolonged period of economic difficulty will be associated with some increase in mortality, both as a consequence of increased poverty and economic distress, and as a result of constrained post-virus spending on health and social welfare.
The Coronavirus induced recession is likely to be deeper than that following the 2008 financial crisis, and is likely to be more prolonged given the scale of the shock to output, the already weaker state of many economies, and the fact that it is global.
The initial UK response of mitigation would have limited the economic damage caused by the virus. We have subsequently joined the rest of the world in taking severe measures to supress the virus, measures that will cause much deeper damage to our economy and the fabric of our society (will the village pubs we will lose ever come back?)
Nobody sane would argue against trying to reduce the health impact of the virus.
If the modelling is correct then we face the prospect of 250,000 additional deaths if we mitigate rather than perhaps 50,000 with measures to suppress the virus. The problem is that the costs of the additional measures now being taken to try to achieve this further reduction are staggering. The health benefits are likely to be offset by further deaths as a result of the prolonged period of austerity that will then be needed to stabilise the economy. The damage to every aspect of our way of life is incalculable.
We have never contemplated similar measures for any previous health emergency, yet have implemented them now with little or no discussion. There needs to be a debate on whether they are disproportionate to the uncertain benefits.