Combating the adverse economic effects of Covid-19

Covid-19 undoubtedly has a negative impact on the economy. Apart from the toll it has had on human lives already, it will have a longer lasting impact on the world economy. Even if the optimistic forecast from the Prime Minister Boris Johnson of “turning the tide” in 12 weeks materialises, the economic effect will be longer lasting.

The government has been pumping monetary and fiscal support to the UK economy. On 11th March, the Bank of England reducing its base rate to 0.1% from 0.25% which also launched a government bond buying programme to pump up to £200 billion in the economy. Then on 17th March, the Chancellor of the Exchequer announced £330 billion of fiscal support. This was followed by more measures on 20th March with more fiscal stimulus. This came in the form of tax liability deferrals for companies promising to retain their employees and not dismiss them. Along with approximately £1bn extra in the form of higher Universal Credit. A rough estimate of the government reaction to countering the effect of the pandemic amounts so far to upwards of £530 billion.

As the details of the government support are becoming clearer, it is becoming evident the self-employed are being left out. Yes, employers and employees need support. But so do the self-employed. Let us not forget that the self-employed provide a significant contribution to the UK economy. In 2018, the Association of Independent Professionals and the Self Employed (IPSE) in a joint report with Kingston University estimated that the self-employed contributed £275 billion to the UK economy. With the spending squeeze being felt across the economy, the self-employed are feeling the financial pain and will continue to do so until the economy rebounds. Of course, one can only guess when the rebound will occur. But I expect it to be towards the end of the 3rd quarter, i.e. around August 2020 in a best case scenario. Then again, this is the best-case scenario so it could be worse.

In short, the entire economy will suffer during the second quarter. That is a fact. The measures announced by the government until now are on the right track but more is needed. To have an effective response that will assist everyone in the UK economy, employers, employees and self-employed, is to provide “helicopter money”. This can be a drastic but very effective tool of monetary policy to deal with the current situation. The idea is simple. Every person who until recently was an active contributor to the UK economy receives from the government “free” money, aka “helicopter money”. This new money will sustain the economy and ease the current strain felt by producers, suppliers, consumers and creditors alike. A back of the envelope estimation of the cost for such a programme is but a fraction of what has been already announced. Based on estimates from the Office of National Statistics there are about 32.9 million people employed in the three months to January 2020. Assuming this figure does not include those who are self-employed, the total UK labour market will be approximately 37.83 (=4.93m self-employed + 32.9m employed) million people. If the government gave £1,000 to each individual that would amount to £37.83 billion per month. Even if this occurred for the next three months, it will cost approximately £113.5 billion.

Is that a lot of money? Yes it is. But compare that to the £530 billion already committed and announced by the government. The “helicopter money” will cost about a fifth of the existing support and most of it will go back to the economy. More importantly, it will be equally distributed across the economy, since a bigger chunk of the existing support is geared towards the affluent and less so to those that are just about managing.

How to deliver this? Employees already pay taxes through the PAYE system with the HMRC. The self-employed need to submit their tax returns. So the HMRC has their Unique Tax Reference numbers. This will allow for cross-checking and cross-referencing with electoral registers to ensure that no-one is getting more or less than everyone else. Nor that anyone is left out.

Is this a Labour manifesto 2.0? Absolutely not. After all, the term “helicopter money” and the notion of giving out free money to spur inflation was coined by one of the most ardent supporters of capitalism: Milton Friedman. Even the US administration is exploring the idea of giving $1000 to every US citizen. So far Labour had its reasons to play to the tune of the labour unions. But forgot to vocally support the self-employed who are, once again, great contributors to the UK economy.

In conclusion, the current UK administration is trying to do the right thing, but they need to go the extra mile and ensure that no one is left behind. If the government thinks and acts creatively such as giving out “helicopter money” to all, including the self-employed, and acts fast enough, its actions will pay back in spades.