Most nations are being plunged into a unique recession, one caused not by economic mismanagement but caused by ceasing activity to fight a pandemic; unlike other recessions, banks did not engage in dubious activities, large-scale and expensive wars were not fought, political instability (while present in the US) is not wide spread.
However, the methods of how to overcome a recession have been thrown into contention, since the IMF has stated that austerity should not be the outcome of the ongoing recession, despite that being their advice for the Financial Crisis of 2008. Austerity is a fiscal policy in which governments reduce public spending to achieve an economic goal (such deficit or debt reduction).
The response of central banks in 2008 is like their current response to the coronavirus pandemic, lowering interest rates and introduction of quantitative easing (the purchasing of assets to introduce “new” money to stimulate an economy). The Bank of England cut inter-bank lending interest rate from 5% to 0.5% and had two round of initial rounds of QE worth £200bn and £375bn in November 2009 and July 2012 respectively. Economic theory states that this is a logical step for mitigating the impacts of a recession; during a recession, the private sectors ability keep an economy growing decreases, hence QE (which in theory is digitally printing new money) and lowering bank lending rates, which in turn is passed on to consumers and firms making borrowing cheaper, helps consumers and firms continue to spend.
This time, the Bank of England has asked banks how ready they are to impose negative interest rates, since the base rate is already at 0.5%; they have also released another round of QE worth £745bn as of June of this year.
The government’s response to the 2008 Financial Crisis can be characterised by the government’s in power at the time; at the onset of the crisis, in which Labour was in power, a number of business were provided to small and medium sized loans, VAT was cut on most goods, citizens benefitted from a small tax cut. Moreover, several bank bailouts (such as the bailout of RBS, Northern Rock) accompanied the fiscal stimuli for consumers. However, in 2010, the UK began a deficit reduction scheme and Labour’s fiscal stimuli were removed; under the Conservative-Liberal Democrats coalition, austerity began to reduce the deficit.
Over the course of the decade, austerity reduced the UK deficit (a deficit being the difference between government spending and government income measured over year) from 7.4% of GDP in 2013 to 1.9% of GDP in 2019. However, this came at a cost; quality of life fell for many affected by the cuts and it is estimated that austerity can be linked to 130,000 preventable deaths due to the cuts in services that supported the NHS. Moreover, many believe that the decade of austerity left public services crippled and vulnerable to a mass scale disaster such as the pandemic; before the pandemic struck, care homes saw budget cuts of almost 50% and complaints increase by 140% since the 2010 austerity measures came into place. Thus it is sensible to presume that part of the reason why the coronavirus swept through care homes so horrifically was due to a lack of preparation for such event and logistical short-comings present well before the pandemic due to a lack of funding.
The past decade may have served as a lesson, not just in the UK but in other richer nations that used a variety of austerity measures that saw quality of life factors stagnate and potentially weakened institutions abilities to prepare for the next large scale disaster. The IMF’s new opposition to austerity seem to be signalling to the world (or at least wealthier nations) to spend their way out of this recession.
While poorer and emerging nations may need to be more careful with their fiscal policy in response to the pandemic, richer nations are now faced with a choice: either to continue to use fiscal stimuli (such as the “Eat Out to Help Out” scheme, the furlough scheme, the US stimulus checks, etc) or begin asking their citizens to get used to the new economic climate (indicators of this will be announcements such as the “Rethink. Reskill. Reboot” campaign that seems to abandon the possibility of some industries being as viable post-pandemic, indicating the government is ready to retract financial support for them).