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Was the response to the covid-19 recession more effective than that in 2008


A recession is a fall in real GDP over two consecutive quarters, meaning that a country will not know it's in a recession until it's happened. This often makes it difficult for Governments to respond appropriately and quickly. Over the last fifth of a century, responses to recessions have altered, which can be seen with the recession of 2008/9 in the Uk and the UK Coronavirus recession in 2020. The Great recession of 2008 in the UK lasted for 18 months, being then the longest period of economic decline since the second world war (Mann Jackson and Acorns 2020). Arising due to banks ceasing to lend, with no lending, there was no one borrowing and so no one repaying debts. This resulted in money being restricted from moving around the circular flow, and thus a negative multiplier, causing economic growth and GDP to fall, and a recession to occur. However, the 2008/9 recession only witnessed a fall in 2.1% of GDP whereas the 2020 recession saw a fall ten times the size at 20.4% of GDP (Office for National Statistics 2020).

Unlike the 2008/9 recession which was predicted by some economists, the sudden threat of coronavirus, which resulted in Government actions causing the recession, caught many unaware. This caused a different approach in terms of fiscal stimulus. The Government's tools to reduce the duration and magnitude of a recession is a fiscal stimulus package. Tailored by each recession and Government of the time, they are focused on macroeconomic objectives and aim to boost real GDP. Ideally, the fiscal stimulus will increase one of the components of aggregate demand (consumption, Government spending, investment and net trade) causing aggregate demand to shift right. This results in Real GDP increasing with the trade off of inflation from a rise in price levels. However, in some cases, seen in 2020, fiscal stimulus will only reduce the magnitude of the fall in aggregate demand rather than increase it, meaning fiscal stimulus on its own will not end a recession. Therefore, was the fiscal stimulus package of 2008/9 more effective on macroeconomic objectives than in 2020?


Full employment

In 2020, the UK Government used the furlough scheme to prevent unemployment. The scheme involved 80% of an employee's wage (up to £2,500 a month) for the hours they could not work in the pandemic (Bernal and Wired 2021). This covered anyone working full time (including those on zero hour contracts or working flexibly). By reducing the cost of employment to firms, the Government managed to reduce the loss firms were making during lockdowns. This created an incentive to keep people in employment and created job stability, both resulting in higher consumer confidence, consumption and a larger multiplier.


However, the furlough scheme did not prevent underemployment. Underemployment occurs when workers are employed in less than full-time or insufficient jobs for their training or economic needs. By paying workers 80% of their wages in return for no labour (as there wasn’t any demand for it), underemployment has become an increasingly prominent issue in the UK labour force.


Unemployment in 2008/9 was also a major issue. Gordon Brown, the then Prime Minister, responded to these figures by pledging to create jobs. Announced in 2009 before the general election, Brown aimed to create 100,000 jobs through capital investment programmes (Hinsliff and The Guardian 2009). However, losing the 2010 election to David Cameron meant the policy was never implemented and so the effectiveness of this policy can not be evaluated.


The response to unemployment during the recession of 2008/9 was delayed, as the Government was trying to decrease unemployment after it had happened. With the recession having been predicted, one would assume that the Government could have foreseen the impact on jobs, and so issued preventative measures against unemployment before it had happened. In 2020, the Government managed to do this, attempting to prevent unemployment (to an extent) with the furlough scheme before it had occurred. Although the impacts on employment may have been easier to see in 2020 as it was Government policy causing unemployment rather than the market, the 2020 fiscal stimulus package was more effective than in 2008/9.


Increasing Equality

The impact of Corovid-19 on people has been unequal, further entrenching inequality within UK society. This has occurred through growing levels of unemployment causing a loss of earnings and increasing poverty. To address this growing problem, the Government has increased spending to maintain jobs, therefore reducing the number of those receiving a fall in income. Two notable examples of this are the furlough extensions (Bernal and Wired 2021) and apprenticeship incentives (Camden and FEWeek 2020). Furthermore, the Government also created the Covid winter grant scheme, worth £170 million, which was distributed to councils from December 2020.


However, it is important to note that the money of the Covid winter grant scheme was given to councils, rather than parents. Some councils used this money to pay private firms to source food for the free school meals programme over school closures. It resulted in scandals across the country with children not receiving the correct amount of food as firms had taken profit out of the sum of money given by councils (Westwater and The Big Issue 2021). Edenred, the company supplying most of the food, had a net profit rise of 33% during the 1st half of Covid, compared to the first half of 2021 (Edenred 2021). This abnormally large rise in profit coinciding with the free school meals programme suggests that perhaps the Government was wrong in placing their trust in private firms rather than struggling families. The misuse of funds further increased the inequality dividing society, as CEOs of firms profited out of Government spending targeted struggling households (Syal and The Guardian 2021). Even with protests from families, the Department of Education did not renegotiate the terms of contract with Edenred. With the Government worryingly untroubled by the events, it raises the question of what a Labour Government would have done.


In 2008/9, the Labour Government made a £21 billion package of tax cuts and spending increases. This loose fiscal policy aimed to boost consumption, causing Aggregate Demand to increase as well as causing Economic growth (Elliott, Wintour, and The Guardian 2008). However, to fund this the Government borrowed money (£78bn in 2008 and £118bn 2009, causing a massive tax debt for the Government. In comparison to 2020, the debt caused by Government expenditure was smaller (seen in the graph showing public sector net debt in the UK from 1997 to 2021 (Statista 2021)). From May 2008, debt rose significantly, and hasn’t been reduced since. It must be considered though, whether the recession would have lasted longer if taxes had not been cut. Therefore, this solution,although at first looking economically destructive, was the best of the worst.


The main difference in this approach to reducing inequality is who the Government has given money to. During the 200/9 recession, the tax cuts effectively gave money to consumers, trusting them to act rationally and spend the money to boost aggregate demand and Real GDP (although money was also given to banks in the form of Quantitative easing which is discussed later). Alternatively, the Conservative Government in 2020 trusted private firms and councilsover households to achieve economic growth. Although these methods are too recent to evaluate the full effectiveness, it is arguable that they were, in short, a failure as managers of firms acted in their own interest and profited from Government money.


Economic Growth

The main aim of all fiscal stimulus packages is economic growth, as without it, there is a reduced supply of public goods, and a reduction in wealth and living standards among other things. In both recessions, loose fiscal policy was used. Fiscal policy refers to the use of Government spending and taxation to influence economic conditions. One measure displayed during the 2020 Coronavirus recession was the lowering of the rate of VAT for firms in the hospitality sector. A reduction of 5% originally took place between the 15th of July 2020 to the 12th of January 2021, however this was extended to 30 September 2021. VAT rates will return to their normal level of 20% on the 1st April 2022 (MHA Moore and Smalley 2021). A reduction in VAT reduces the variable costs for firms. This results in an increase in output, as well as a rise in supernormal profits. A rise in supernormal profits will keep firms operating and potential result in an increase in investment and consumption. Being components of Aggregate Demand, AD would increase, causing real GDP and economic growth to increase.


However, these schemes did not have an effect to the desired level. Despite large amounts of Government spending, confidence still remained very low due to job uncertainty. Furthermore, the unexpected nature of lockdowns meant that it was very difficult for businesses to plan expenditure, thus meaning consumption remained low.


In contrast to the 2020 recession, during the 2008/9 recession, the Government gave money to banks, rather than consumers. This is partially understandable as the main route of the financial crisis was the financial sector. The Brown Government used quantitative easing. This is when the Government purchases financial assets, giving money to the banks. The scheme is funded by the creation of the central bank reserves which are paid for by selling Treasury bills (short term 90-day loans) (Hodder Education 2019, 45). Between March and November, the economy’s output increased by 2% due to quantitative easing. The money also helped raise liquidity in the banks and the economy, as well as regulating the inflation rate (Richards and Cash float Blog 2020). Deflation was a growing issue during this period, as wages and prices were falling in value but the total amount of debt stayed the same. Therefore, the inflation caused by quantitative easing cancelled this out. On the other hand, quantitative easing also caused a fall in real wages. This led to a reduction in disposable income, and so consumption fell. Consumption, making up 60% of Aggregate demand, resulted in aggregate demand falling and so real GDP and thus Economic growth fell, going against the main goal of quantitative easing.


Although quantitative easing was partially successful, giving money to banks rather than consumers meant there was a reduced multiplier in 2008/9 compared to 2020. This was particularly evident with city bankers receiving £13.2 billion in bonuses in 2008 whilst ordinary householders were faced with threats of unemployment (Teather and The Guardian 2008). The inequality of wages that emerged after high levels of Government spending suggests that perhaps the money did not go towards its intended purpose. This was partially recognised in 2020, and so the Government put spending towards consumers, knowing that they would act rationally and maximise their utility by making use of the schemes such as “eat out to help out”. Therefore, although difficult to predict the final outcome of 2020 measures, the fiscal stimulus package of 2020 was more effective than in 2008/9. However it is important to recognize that other 2020 schemes, like the winter covid grant scheme, gave money to firms rather than households.


Conclusion

In conclusion, the 2020 response to the recession was more effective than in 2008/9. This is partly due to the response being proactive rather than reactive during the credit crunch. Therefore, the fiscal stimulus package managed to prevent issues reaching a critical level. This differs from 2008/9 where the impacts of the recession were not prevented, so it reached heightened severity, negatively impacting people within the UK more so than in 2020. Furthermore, the Furlough scheme was a lot more effective in keeping unemployment figures low then the job creation scheme of Gordon Brown (bearing in mind it never got to be carried out). This is because it acknowledged the reasons why employment opportunities were falling; total revenue equaled total variable costs due to the lockdowns, and so firms attempted to reduce variable costs by making employees redundant. Therefore, the Government subsidised firms to keep employees, by decreasing the variable cost of employment, and making total revenue greater the variable costs so firms did not shut down in the short run.


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