Adam Smith Institute

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Without a plan to reopen the economy there won't be one to reopen

A new paper from the Adam Smith Institute accuses the OBR of downplaying the lasting risks of the ongoing economic shutdown and challenges the government to come up with a plan for after the end of the lockdown.

  • The outbreak of a deadly pandemic has necessitated the forced closure of one-third of the economy – causing a sizeable immediate decline in incomes and rise in unemployment.

  • The longer the lockdown, the more businesses will run out of cash, lose hope, and shut down. This will cause substantial unemployment – the extent of which may currently be hidden by the ability to furlough employees. 

  • The OBR’s scenarios are underestimating the network effect of the economy and the risk of systemic economic decline if lockdown is sustained. 

  • The UK is behind countries across Europe including Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic in developing a plan to exit lockdown.

  • ‘Lives versus livelihoods’ is a false dichotomy — a strong economy is what keeps people fed, housed, and ensures we can afford quality health services.

  • The UK should remove barriers to investment, reduce taxes on employers, cut corporation tax, reduce the burden of red tape, and remove transaction taxes to boost the private economy after the lockdown. 

The outbreak of a deadly pandemic has necessitated the forced closure of one-third of the economy – causing a sizeable immediate decline in incomes and rise in unemployment. The Adam Smith Institute argues that if we’re to lessen the damage to people’s lives and livelihoods, the UK government needs to develop a plan for the phased end of the lockdown to implement when medically sensible. 

There is broad consensus on the negative immediate economic hit from the lockdown, and support for the government’s public health oriented aims.The free market think tank argues, however, that analysts such as the Office for Budget Responsibility who have “assume[d] no lasting economic hit,” have significantly underestimated the damage being done to firms. They argue that the challenge of reanimating the economy after the lockdown has not been fully understood because of the interconnected nature of the economy.

Ordinary people looking to their own finances, jobs, and businesses take quite a different view. According to a recent YouGov poll: just 11% think the economy will bounce back quite quickly, 42% say it will be worsened for a few years and a further 41% say the economic damage will be much more long term.

The impact of the lockdown grows deeper and faster over time, with each business that closes causing knock-on issues for their staff, suppliers and customers, shareholders and creditors. The more businesses that fail, the more in turn come at risk and pass their risk onto others — just like how a virus can multiply through a population. 

High profile businesses like Debenhams, Laura Ashley, and Flybe that have already called in administrators will be the tip of the iceberg, says the think tank, as it warns that these businesses will pass on disruption to other companies integrated into their offer to clients or reliant on their custom.

The longer that a lockdown goes on, combined with the slow rollout of emergency grants and commercial loans, the more businesses will run out of cash and be forced to close. The country’s 5.9 million small and medium firms are most at risk. The British Chamber of Commerce has found that a majority (57%) of businesses have three months or less in cash reserves, while 6% of firms have already run out of cash. Unsurprising when we think just £8.7billion of the £330bn in emergency loans announced by government have been paid out.

A phased plan would allow companies to assess the feasibility of their operations and calculate the worth of borrowing; the longer lockdown continues, the less feasible an option this is. The greater the systemic loss of industry and mass unemployment, the deeper the risk of depression and the harder any economic recovery will be. 

The Adam Smith Institute’s challenge for a phased plan to end the lockdown comes in the wake of a similar call by the Labour Leader Keir Starmer. An open and transparent exit plan is more likely to ensure a broad public and that measures, such as strict social distancing, can be maintained for as long as is necessary. 

The ASI are also calling for the reopening strategy to focus on how to ensure the return of jobs and growth, by removing unnecessary barriers and excessive state involvement in the economy. 

If the Government wants to safeguard the people’s lives and livelihoods they must, the think tank argues:

  1. develop, and release, a phased plan for lifting the lockdown to provide greater confidence for businesses and citizens:

    • following the best possible public health research and latest evidence;

    • explicitly aiming to prevent subsequent mass outbreaks and loss of life;

    • including a strategy for decentralised mass testing, and isolation and tracing of cases while protecting privacy;

    • encouraging physical distancing, maintaining limits on mass gatherings and special measures for at-risk groups in early stages;

    • allowing as many businesses as possible, as quickly as possible, to reopen their operations;

  2. scale back the state's extensive role in the economy after the crisis to avoid crowding out the rebooting of the private sector; and

  3. introduce policies, both permanent and temporary, that will enable the economy to bounce back after the crisis, including cutting excessive red tape and taxes that discourage investment.

The think tank stresses that the government should only begin lifting the lockdown following the advice of clinicians that the outbreak is under control. However they argue that the clinical priorities need to be set and stated much more clearly: not only so that people know why the economic pain must be endured, but to allow debate on how much economic pain should be endured in return for the clinical benefits.

Countries across Europe including: Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic have announced reopening strategies and even timelines; Britain is falling behind and businesses are being held back from planning at the most crucial moment. 

Dr Eamonn Butler, Director of the Adam Smith Institute and co-author of the report, said:

“The dislocation that is ripping through the economy because of lockdown is like the virus ripping through the population. Each business failure produces many more, just as each infected person infects many more. Unless you get to grips with it fast, things soon escalate out of control. Business failures, bankruptcies and unemployment rocket. So we have to lay plans for how we are going to unwind the lockdown, and do it now.”

Matthew Lesh, Head of Research at the Adam Smith Institute and co-author of the report, said:

“The limbo must come to an end. The closure of one-third of the economy has been necessary to slow the spread and protect the health service — but it cannot last forever. We need a route out of this mess: a strategy to protect from this virus while allowing life to progressively return to normal. This will mean testing and tracing capabilities ramped up, maintaining physical distance in shared spaces, but allowing as many businesses as possible, as quickly as possible, to reopen their operations.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.