The coronavirus recession will shift British politics

The economy’s collapse will prompt profound and unpredictable changes to people’s political priorities

It is hard, for us moderns, to grasp what is happening to our world. We are the children of the most technologically advanced civilisation of all time, and yet are plunged into a pre-modern health crisis, forced to revert to equally pre-modern tools as the death toll spirals horrifyingly. Quarantines, lockdowns, field hospitals: as we wait for tests, protective equipment, high-tech tracing and vaccines, we are stuck with the medieval techniques our forefathers used to control the bubonic plague. We use Zoom and Houseparty, but otherwise are following a 1919 Spanish flu playbook, shutting down society to save lives.

This is also the first pre-modern recession since the Second World War. Downturns since the industrial revolution have normally been about monetary policy errors or bubbles going pop. The coronavirus recession is like a war or a crop failure or a natural catastrophe, events that, together with pandemics, have caused the most savage depressions in history.

Drawing on the Bank of England’s Millenium of Macroeconomic Data, Deutsche Bank reminds us that the worst ever recessions were in 1624 (GDP down 25 per cent the year Parliament voted for war against Spain) and 1349 (down 23 per cent during the Black Death). The current downturn – GDP down 6 per cent this year – will only be slightly less severe than those of 1919 and 1921, both connected to war and flu. No “modern” recession has come close. It is also an exceptionally concentrated collapse: the second quarter will be the worst three month period for the economy since records began.

In 1919, those US cities that reopened too soon suffered a worse overall hit to the economy – after the flu returned with a vengeance in a second peak – than those that waited longer in lockdown, according to Sergio Correia, Stephan Luck and Emil Verner. While the lessons are obvious, if we test and trace on a massive scale, we ought to be able to lift the lockdown more quickly than a century ago. But so far it’s not looking good, implying that this recession will be severe, perhaps continue into the third quarter, many firms and jobs will be permanently destroyed and that the bounce-back, when it comes, won’t be great enough to catch up all the lost output.

It is a golden rule of political economy that downturns of this magnitude have huge political ramifications. But while much will be different AC (After Coronavirus), this doesn’t mean that British politics will automatically shift Left-wards. That would be a lazy assumption.

The NHS was already untouchable and unreformable, and Boris Johnson was already planning to shower it with cash: it will merely get even more. The railways were already being renationalised: the crisis has accelerated this. Other bailed-out entities will be reprivatised.

It will be self-evidently unaffordable for the Government to continue paying for half the jobs in the country when the crisis ends, and some of the abuse of furloughing that can even now be detected will remind the public of the dangers of generous welfare. Rishi Sunak’s superstructure will be dismantled: extremely elevated levels of benefits essential during total war can’t continue in peacetime without massive incentive problems.

The greatest change AC will be to our culture, and this won’t help the Left: we will rediscover the advantages of economic growth and have to relearn to live with unemployment. The BC (Before Coronavirus) obsession with frivolous “first world problems” will be gone: there will be no interest in identity politics, just in hard-headed policies that can boost growth and jobs and put money in people’s pockets. There will be a cost of living crisis, and reduced support for taxes or green policies that hurt the poor and middle class, just as there was in 2008-09. It may delay but won’t derail Brexit: national self-interest is back worldwide. The EU is facing severe strains, with fury at how member states aren’t helping each other and Hungary going fully undemocratic.

Taxes may not go up either, at least not conventionally, despite the massive budget deficit (though the self-employed will be hit). The national debt may be “repaid” without explicitly hammering taxpayers: we may see higher inflation in the years ahead, eroding the real value of IOUs. We could even see actual debt write-offs: a rich world Jubilee.

And why would a Tory government be stupid enough to cripple an economy on its knees with higher taxes? A million businesses could easily have gone bust by the end of this, unemployment will be through the roof and asset values – including house prices – could have dropped by 20-25 per cent. Hurting the rich for populist reasons is something that governments can afford to do in the good years, not when they are desperate to attract entrepreneurs, capital and talent. Taxing wealth will be impossible when the price of mansions has collapsed, and hitting the middle classes politically suicidal. The Tories will have to rediscover their supply-side instincts, and do what it takes to encourage growth.

Any higher inflation caused by the monetisation of the deficit will also infuriate Middle England. Only Left-wing economists believe that inflation is popular: it never is. It always leads to a shift to the Right, sometimes to the poujadiste variant.

Many private sector businesses will have their reputations enhanced by their crisis, including supermarkets and even tech firms. Almost everybody blamed profit-making firms for the financial crisis; nobody is blaming them for the virus. There are some caveats: banks can’t pay dividends or bonuses anymore, which will limit the backlash, but they will face reputational damage unless the cheap business loans promised by the Government can be accessed easily.

Most important of all, Johnson’s plans for a big government conservative spending spree are in tatters. With the national debt at 100-110 per cent of GDP, it will become imperative to keep the finances under control, and only spend more on projects to prevent another pandemic.

Nobody can know for certain how politics will change as a result of this humanitarian and economic catastrophe. But as our shell-shocked society, stunned that it isn’t as advanced as it thought it was, goes back to basics, I wouldn’t bet on a Left-wing renaissance.