How Can I Keep My Job By Spending?

Can I keep my job by just spending? Probably not just like that.

The Office for Budget Responsibility, the Treasury’s official forecaster, warned that UK Gross Domestic Product could fall by 35 per cent in the coming months due to the coronavirus lockdown. 

The world economy looks like it’s a on the brink of recession.

Unemployment is on the rise, businesses temporarily shut as a result of lockdown measures, some of which may not reopen anytime soon. Just as you are worried about the future of the economy, here are the  Government’s plan to get the economy back up and running.

Government’s Role in a Recession – The Built-in Stabiliser.

An in-built stabiliser is “any aspect of government taxation and expenditure policies that automatically reduces government expenditure and/or increases government tax revenue when income and output are increasing, or that automatically increases government expenditure and/or reduces government tax revenue when income and output are falling”. 

The most important in-built stabilisers are taxes, income contributions NI and price supports.

Most economies (capitalist) have a comprehensive system of unemployment trade-off financed by employer and employee contributions, which are related to individual current income. In any recession, as unemployment rises and employment incomes fall (just as we now see in the UK due to the coronavirus pandemic), the amount paid out in unemployment benefit has increased and the income obtained from contributions (National Income NI) has fallen.

 The effect of unemployment benefits in the UK is to reduce the decline in income experienced by the unemployed, which allows them to maintain consumption than would have been difficult if there was no income at all. The adverse effect on the economy from a fall in employment is therefore reduced.

So will the built-in Stabiliser Be Enough?

In certain circumstances such as the current coronavirus pandemic, built-in stabilisers may be unattractive. If an economy in an event of high unemployment rate or high inflation, the effect of these built-in stabilisers may produce a fiscal drag which is not what the economy needs right now.

We take fiscal drag as a factor that prevents the aggregate demand. An increase in taxes paid will reduce aggregate demand, 'if we pay more in taxes we are not encouraged to spend more on goods and services. Same applies to investors who will not be encouraged to invest as investment becomes less attractive. 

Government Schemes to Support Businesses

In an attempt to prevent a recession due to the coronavirus pandemic, the government knowing that the inbuilt stabilisers may not get the economy back up blooming, they announced these measures

“Our Covid-19 support schemes have provided over £15 billion for business in just a few weeks. We’ve put in place:

-          our job retention scheme - more than 500,000 claims have been made to the value of £4.5 billion

-          business grants - half a million business properties have benefited from £6 billion of business grants

-          the Coronavirus Business Interruption Loan Scheme - with over 20,000 loans

-          the Covid Corporate Financing Facility, which has provided over £14 billion for larger firms

-          generous VAT deferrals worth billions of pounds

-          scrapped businesses rates

-          covering the cost of statutory sick pay

-          the new scheme will run alongside the existing Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS)

We are also taking additional steps on the Coronavirus Business Interruption Loan Scheme (CBILS) to ensure that lenders have the confidence they need to process finance applications quickly, including removing the per lender portfolio cap for the government guarantee, and changing the viability tests that so that all banks will need to assess is whether a business was viable pre COVID-19”

In addition to this, there is also the government backed loan of up to 25,000 for new start-up businesses or those that have been trading for up to 24 months.

The Role of the Bank of England during the Coronavirus Pandemic

The main duty of a central bank is to control the commercial banks around it in such a way as to support the monetary policy of the economy. It conducts its business activity by acting as the bankers’ bank and lender of last resort, and also as a government’s bank and manager of the public debt. 

By doing this, the central bank is accountable for the conduct and process of monetary policy that attempts to control the level of economic activity. That involves regulating the supply of money and the cost and availability of credit.

In this current circumstance, central bank is buying bonds. The desired effect is to increase the supply of money and reduce the cost of borrowing. As expected starting on April 7^th, the UK government will double the size of its corporate bond purchase program to at least 20 billion pounds this is part of the stimulus package to help the economy during the coronavirus crisis.

Open market operations influence the cost of borrowing as well as the supply of money. If the central bank purchases bonds, the cash reserves of the commercial banks rise and the commercial banks will wish to lend more both to private customers and to business concerns. 

This has led to a reduction in interest rates which will make some investments profitable that were previously unprofitable at the higher cost of borrowing. With a reduction in the interest rates, the desired result is to make investments more attractive due to low cost of borrowing.

With the current changes (the government schemes to support businesses) in the availability and the cost of credit, this will influence the level of aggregate demand. Aggregate demand is the total demand for final goods and services in an economy.

 Raising aggregate demand, will lead to a multiple expansion in national income. This is the end game for the government.

The Role of the Public to raise the Aggregate Demand

So if the sole purpose of the government is to increase aggregate demand what does this translate to?

-          As aggregate demand increases, unemployment reduces (firms will hire more to meet increase in goods and services)

-          As unemployment reduces, contribution increases and benefits reduces

-          As contribution increases, income from tax increases just like government income grows.

This is always the problem in any country; it’s like trying to hit a target in a moving goal post. With all this policies in place, the Government will be hoping that:

The public do not hold money either as bank balance or at home. In the early stages of the lockdown / pandemic, a large number of the public bought lots of foodstuff and this rush led to stores having lesser products especially toilet rolls. 

A customer who would normally buy 4 packs of roll in a month goes on to buy more than 20 packs and keeping the excess at home. Why would anyone buy more they need for a given month? 

For aggregate demand to rise, in other words for unemployment rate to reduce, investment must rise, spending must rise and less money in the bank. With government increasing supply of money, the expectation is that we will have to spend our excess cash on goods and services and this will raise the aggregate demand and as firms produce more, there is the need to hire more.

Investment becomes more attractive and investors will borrow more money due to the lower interest rates. 

By now I can expect that we know how this works. So, everything the government has done or plans to do, is to raise aggregate demand and forecasting the reaction from investors and consumers to take up loans, spend and invest.

Why would anyone store up excess tissue at home? The likely answer is the same reason anyone would keep excess cash in bank balances and not spend it. When interest rate is low, people put their money elsewhere in assets that will yield a higher return like properties, shares, buying or starting up businesses. But people will likely keep their excess in the bank even though interest rate is low because of uncertainty.

The uncertainty about the lockdown and the future as a result of the pandemic led to panic buying. The same reason that an investor who is unsure about the future may be reluctant to take up new loans even though interest rate is low. Uncertainty could be a reason to keep excess cash in the bank even though interest rate is low.

Another factor that could affect government plans in brexit. The uncertainty surrounding brexit may make businesses and consumers hold money for speculative purposes. I may likely buy a new car as soon as I get a chance if there’s a speculative of an hike in price of new cars. I may also hold my excess cash if there’s speculation that a cost of a commodity or stock/investment will fall in the future.

Finally, the coronavirus factor. In the past few weeks businesses have been affected due to the pandemic. We have seen lockdown around the world with businesses shut down temporarily.

What the economy does not need is another wave of the pandemic. This may offset every plan the government has put in place to increase employment. Also, some businesses rely on exports to function. 

Everything the government has done is only a forecast but what we can do is be positive about the future. 

We need a collective action from everyone of us to get the economy to been productive again. We are the government, the investors, sole traders and the consumers. 

Every decision we take will either have a positive or adverse effect on the economy. 

Whilst I am not writing this to tell the public to go spend their savings, this is just to tell the events that may bring back the economy up again.