Insight
An unequal recovery would be politically explosive by John Springford, 29 January 2021
When restrictions are eased, office workers will spend while poorer people, who have been more likely to get COVID-19, may struggle. Governments need to find ways to make the recovery fair. The debate about austerity has already begun in Europe. Germany’s former finance minister, Wolfgang Schäuble, and the head of the German Chancellery, Helge Braun, recently suggested that national and European fiscal rules may need to be relaxed, causing a backlash among more hawkish fellow Christian Democrats. Rishi Sunak, the British Chancellor, is currently refusing to make permanent a £20-a-week uplift in unemployment payments, enacted during the first wave of the pandemic. Centre-right parties are still the biggest political forces in most European countries: in order to stop the populists and safeguard democracy and market capitalism, they must discover their inner social democrats. They – and governments led by the centre-left – should provide a pro-poor fiscal stimulus once vaccines allow social distancing to be relaxed, followed by tax and benefits reforms that shield poor people’s consumption from any attempt to reduce fiscal deficits. A rapid return to fiscal rectitude would lead to further stagnation, sending more voters towards the extremes. Politically, the combination of spending cuts, tax rises and weak income growth over the last decade has been highly destabilising. And the pandemic has hit poorer people much harder – measured not only in infections and deaths but also in lost incomes and jobs. When Europe’s finance ministers rushed through furlough programmes last spring, they did not cover 100 per cent of people’s wages, because they wanted to encourage people to work if they could. That was understandable, but it led more lower-wage workers to continue to work, often in jobs that could not be done from home, raising infection rates and deaths. Furthermore, companies that have been hardest hit by lockdowns in the hospitality, travel and tourism industries are most likely to get into difficulty, and jobs in these sectors tend to be low paid. Meanwhile, many office workers have continued to work and get paid largely as normal (albeit at home). If the recovery is as unequal as the pandemic itself, the political consequences could be explosive. And because there is so much uncertainty about the future, governments need to err on the side of promoting a consumption-led recovery, even if that risks higher inflation: businesses will rehire workers and invest more rapidly if they can be confident about higher demand coming down the track.
CER INSIGHT: An unequal recovery would be politically explosive 29 January 2021
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