Generally, economic crises build up slowly. There are the straws in the wind, the sudden lurches downwards, the false dawns, the policy missteps, and finally the dam bursts.
You have to go back to 1914 for a crisis to come out of nowhere. Then, it took just eight days from the assassination of Franz Ferdinand for the London Stock Exchange to be closed and for a run on the Bank of England to begin. Fortunately, J M Keynes was at hand, coming down from Cambridge on his brother in law’s motorcycle, to help Lloyd George and the Treasury overturn Bank of England orthodoxy. Following a four day bank holiday, the Treasury began printing its own bank notes. Confidence was restored.
Rishi Sunak and the Treasury have had a little more time to plan the response to COVID-19. But not much. The sheer scale of the current crisis has only become apparent in recent days: last week’s Budget already seems a long time ago.
Fortunately, Mr Sunak’s response has been sure footed. He is working hand in hand with the Bank of England – a luxury not always available to the Treasury in the past. He has a battle-hardened team who cut their teeth in the 2008 crisis. At times like these, experts matter. And he appears blessed with the right temperament, subscribing to Keynes’ axiom that “when the facts change, I change my mind”.
Sunak was right this week to say: “this is not a time for ideology and orthodoxy.” He has to do whatever it takes. This is where judgement is important. During a crisis, every armchair general has a pet plan. Whatever the government does, it is not enough.
The job of the Treasury is to impose some discipline. It has to design interventions which are cost effective. That requires relentless prioritisation. It also requires relentless focus on delivery: schemes have to be implemented at pace. The reason Alistair Darling cut VAT in 2009 was that could be implemented over night while a cut in national insurance would take HMRC six months to put into effect.
Policy making at a time of extraordinary uncertainty does not have to be perfect: so long as it is two-thirds right it is good enough.
In the first instance, the Treasury and the Bank have to pull levers that are readily available: interest rate cuts, liquidity to the banking system, loan guarantees for firms, business rate reductions and forbearance from HMRC.
The Treasury will need to go further. It’s one thing to give a rate rebate to a restaurant which cannot trade. But that does not help the restaurant’s supplier which if it is a small business cannot access the banking system.
And so there are further announcements, starting today, for more generous grants to business, better sick pay and – a scheme which worked well in the late 1970s – temporary employment subsidies.
Of course, none of these measures alter the fundamental problem that as we are holed up in our homes there are few opportunities to spend money on anything much else than food and Netflix. That is why the government, along with landlords and the banks, have no choice but to hold the ring until the country gets through it.
There will be more intervention and more regulation in the weeks ahead. We are now in a war time economy where socialist dirigisme has a role unthinkable in peace time. Debate will be underway about increasing social security benefits – a way of better targeting “helicopter money”.
At times like this, it is easy to believe that the world is coming to an end. It isn’t. Britain has been through much worse. Britain has extraordinarily deep capital markets. It hasn’t defaulted since 1672.
The Treasury will already have one eye on the recovery: how to unwind the interventions and how to curtail the consequences of ever increasing government debt. Here, there are two models: the century of Gladstonian orthodoxy which followed the Napoleonic Wars, or the forty years of Keynesian inflation which paid for two world wars. The sensible Mr Sunak will seek to chart a middle way.
Nick Macpherson was Permanent Secretary to HM Treasury from 2005 to 2016