If you go as far back as the 1940s, British economic policy has largely revolved around an ideological tussle between two unique schools of thought.
One gets cosy with the interventionist ideas and thoughts of John Maynard Keynes, while the other embraces ideas set forth by the likes of free market thinkers such as Friedrich Hayek and Milton Friedman.
But as financial pressures mount due to coronavirus, a rather well-known Richard Nixon quote instantly comes to mind – where he declared that during times of economic and financial crises, even those who for the most part favour free-market philosophies hesitantly employ more interventionist policies. And he quoted: “We’re all Keynesians now.”
But what if you’re on the free market? Surely, you can’t be a very big fan of Keynesian politics. Particularly if you support the Conservative parties.
I myself am a firm believer in small state and do feel that opportunities are best created via a free market.
How the UK Government is absorbing the Coronavirus hit
Indeed, the UK Government has coughed up a £30 billion stimulus package to offset the financial ramifications, followed by a generous £330 billion in guaranteed business loans.
In fact, post-coronavirus, the Government is not only going to spend massively on infrastructure with mantras like “build, build, build”, but also use the state’s resources to furlough workers;
A job retention scheme has been launched to pay a good 80% of the wages of workers, through £2,500 each month – with the government receiving applications to furlough payments for over 387,000 firms to help pay more than 2.8 million people. Even though a similar scheme has been set up to compensate the nation’s 5 million self-employed professionals, millions will likely receive no support whatsoever under the current plans.
The government has also made promises to back businesses with over £300 billion in loans. The central bank, in fact, has slashed interest rates down to the lowest ever recorded – 0.1% – and injected £200 billion into a quantitative easing bond-buying programme, which they believe will lower borrowing costs for both businesses and households.
Despite how many had hoped that these generous interventions would aid companies in bridging the large gaping black hole in sales, most businesses are still struggling to access financial support, and many have had to lay off workers as a result.
Eye-watering figures indeed – but there’s a problem: when governments intervene with huge amounts of money in a pandemic, it’s in fact, with our own money!
And folks are somewhat delusional to think that this won’t be paid back out of our own pockets. Even the government has admitted that it can’t support this kind of ‘bailout spending’ forever.
History has shown from the 2008 financial crisis that a whole decade of lost growth followed due to the government’s financial intervention which took place then.
But think about what could have happened today had we not attempted to reduce the deficit from the financial crises – we would have been in a worse position than we are today. We wouldn’t have been able to borrow the money – neither would the Bank of England would have been able to purchase all their assets from governments or those bonds – which would have created a rather precarious situation. A situation where the government wouldn’t have been able to intervene even at the lowest level.
Government spending straight out of the Keynesian economic book
Even though the 2008 financial crash was initially responded to with a textbook Keynesian response by Gordon Brown’s government, it sparked a fresh economic policy direction, following the 2010 election. If you recall, David Cameron argued that the crises was a direct result of profuse spending by the Labour government and put forward a range of austerity measures which would cut down the government’s budget deficit.
He also presented key decisions to cut down on public spending, one which was a necessary step, he believed. Cameron even stated in a 2013 speech that if there was another way, he would do it, but “there was no alternative”. Such policies actually became the norm in the UK and were avidly supported by Conservative parties after the 2015 and 2017 general elections.
However, it must be noted that despite these rhetorical strategies in regards to the end of austerity measures, this was something not borne out in policies – it remains somewhat ambiguous so as to what extent the debt crisis was actually resolved.
Now, on the subject of tackling the current economic crisis, it seems the government is again using the “let’s do whatever is necessary” mantra. And this suggests that the spending is not politically motivated but rather something that simply must be done. In fact, it sounds like a love letter to Cameron’s “there is no alternative”, even though different outcomes have likely been planned.
Will things play out differently this time?
The Conservatives have always prioritised a low-spending, low-tax state and see income tax reductions as the best means to incentivise labour and increase individual wealth.
Once the coronavirus crisis subsides, political considerations will again come into play. Against a potential backdrop of even lower growth rates than before, there will probably be little political motivation to introduce radical change now.
The answer is a small state and free market, not Keynesian economics – that kind of stuff doesn’t work in the world we live in today.
Not only that, but I honestly feel that if our government makes a more proactive effort to get the deficit down now rather than later through reasonable tax cuts – then I think we are well on our way. Tax cuts during times like these can really help drive business growth and boost tax revenues across the board too, so what have we got to lose, really, by not doing so?