Future-proofing fiscal stimulus for the post-COVID-19 world

16 June 2020

By Tera Allas CBE FAcSS (Director of Research and Economics, McKinsey United Kingdom and Ireland Office)

Fresh strategic thinking could be key to ensuring that any post-COVID-19 fiscal stimulus fully supports the government’s aims for long-term, sustainable, equitable growth.

COVID-19 has not changed the fundamental long-term priorities for the UK

Countries around the world have had to take unprecedented steps to contain the spread of COVID-19. These actions, in turn, have had a major disruptive effect on most businesses and people. As much as 35% of economic activity may have been curtailed in April, and any return to previous levels of output is likely to take time. Amidst the crisis, the UK government’s short-term economic policy has therefore focused on avoiding unnecessary business failures and permanent job losses.

Given the abrupt impact on everyday lives, it might be easy to jump to the conclusion that everything has changed. Yet, an interesting feature of the crisis is that, for the most part, it has simply accelerated economic trends that have been in place for at least the last 5 to 10 years. Globally, supply chains were already being reshaped, as regional economies in emerging markets were becoming more important as hubs of activity. Automation of manual, routine work could now be even more attractive, as businesses aim keep their customers and employees safe. Digital services, online platforms and remote delivery have boomed – but were already taking over ahead of the crisis, at least in the UK.

From a policy perspective, many of the challenges facing the UK have deepened as a result of COVID-19. The drop in oil prices has made low-carbon investments appear less attractive. Productivity growth – while boosted by hastened digitisation and creative destruction – will likely suffer overall, due to short-term uncertainty, a pause in business investment, and a reduction in staff training. (Figure 1) Regional and local disparities – as well as those between highly educated and lower-skilled workers – are likely to have gotten worse. Pre-existing talent shortages are likely to have widened, in basic and advanced digital, management and leadership, and communication skills, and in the health sector.

FIGURE 1

Can traditional fiscal stimulus measures achieve the optimal policy mix?

As policy makers’ thoughts turn to post-crisis recovery, many discussions are already taking place about the fiscal stimulus package that might be deployed. Rightly, many are keen to ensure that the UK does not forget about its climate change commitments and uses the opportunity to pave the way to a lower-carbon future. With infrastructure having already featured strongly in the governments’ previous proposals for “levelling up”, these plans are likely to be fast-tracked.

There are many good reasons for focusing on infrastructure. In the right places, it enhances long-term growth, and it tends to have high fiscal multipliers, contributing to economic recovery. But in an ageing, low-carbon, digital society, it is unlikely to be the only ingredient needed to boost prosperity for all. For example, there is limited evidence that better broadband – on its own – materially enhances productivity. According to Ofcom, in 2019 there were only around 53,000 homes or businesses (0.2% of all UK premises) that did not have a decent fixed line broadband or a good 4G mobile network connection.

In contrast, there is a large amount of evidence that higher skill levels in the adult population are a critical element of higher productivity, better quality jobs, lower inequality, and broader wellbeing. For example, skills mismatches are an important reason for job dissatisfaction. Adult skills is also an area where the UK lags behind, and where inequalities tend to be exacerbated, as people with lower levels of education are significantly less likely to receive in-work training. Yet, lower skilled people are the most at risk of being displaced by AI and automation in the future. (Figure 2) These issues cannot be solved by education alone, given that the vast majority – around 80% – of the UK’s 2030 workforce is already at work.

Moreover, prioritising only traditional fiscal stimulus measures – such as infrastructure and R&D support – could further widen the gender divide. Around 85% of people employed in the construction sector – the main beneficiary of infrastructure investment – are male. Men also make up around 80% of science, research, technology, and engineering professionals. Yet, the people most impacted by the COVID-19 crisis – whether due to job insecurity, additional caring duties, or mental health concerns, such as anxiety – are women. Most of them are unlikely to work for the 0.5% of UK businesses that benefit from, say, the R&D tax credit.

FIGURE 2

Post-COVID-19 economic policy could pivot towards a more resilient future

The UK’s position in global financial markets remains strong, with access to low-cost debt financing. In an economic downturn, policy makers typically borrow more and spend the money on things that will boost recovery and improve the economy’s long term prospects. But they could also be thinking about how to build a more resilient society and use this opportunity to address some of the UK’s long-standing socio-economic issues.

Just like businesses are having to reimagine the future for their sectors, so could government. Operationally, the further use of data, automation and digital tools could help make government itself more productive in delivering necessary services to the public. A more digitally capable public service would likely also be more citizen-centric and agile in its problem solving and delivery. On a more strategic level, however, the COVID-19 crisis could also prompt a rethink of government’s over-arching priorities.

For one, its future plans could directly recognise the nature of the UK’s ageing and service-based – and in many cases, low-skill, low-productivity – economy. This would imply a significant additional investment into a broad set of adult workforce skills. By 2030, two thirds of the UK’s workforce might be under-skilled in basic digital competencies. This could be a major vulnerability not just for competitiveness, but also resilience against shocks. For example, during the COVID-19 crisis, European countries with broad-based basic digital skills across their populations appear to have suffered the fewest job losses. (Figure 3)

FIGURE 3

A holistic approach could also mean incorporating health and wellbeing into the UK’s recovery plan. Such a shift would be consistent with the aspiration for national objectives to go beyond GDP, and would recognise the huge role that health plays in the economy. Serious investment into wellbeing could not only provide a good return; it could ensure that any job creation scheme also provided opportunities for women (assuming that transforming the highly gendered nature of work overnight is not realistic). Many people displaced by COVID-19 or automation could find meaningful work in the health and social care, mental health and counselling, child care, and teaching and training professions.

Like in any crisis, there might be a temptation to reach out for policies that seem to have worked in the past. There is nothing inherently wrong with that. But, in addition, fiscal stimulus could also be targeted at future-proofing the UK’s economy. This would mean prioritising – alongside other measures – wide-spread technology adoption, adult skills, health, and wellbeing.

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Tera Allas CBE FAcSS is Director of Research and Economics in McKinsey’s United Kingdom and Ireland Office, working closely with the McKinsey Global Institute. She leads McKinsey research on impact of COVID-19, productivity, technology adoption, the future of work, and government effectiveness, bringing together deep expertise and more than two decades of experience in economics, public policy, innovation, technology, and leadership, as well as ten years of experience as a management consultant focusing on corporate and business-unit strategy.

The perspectives expressed in these commentary pieces represent the independent views of the authors, and as such they do not represent the views of the Academy or its Campaign for Social Science.

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