Long Covid Hits UK Economy Harder Than Most Other Countries

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“It does appear” that Covid provided a training ground for people to claim welfare to prop up their incomes, Leunig says. “Sickness benefits are more generous than out of work benefits, so everybody wants to appear to be sick.” Productivity, the wellspring of living standards, crashed and GDP per head has yet to recover to pre-pandemic levels.

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Toxic legacy

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Britain’s swollen national debt, high interest rates, rising benefit bill and lackluster growth have left a toxic legacy: a historic postwar tax burden and crumbling public services, as debt interest cannibalizes departmental budgets. It is no accident that dissatisfaction with the National Health Service is worse than it’s been since the British Social Attitudes survey began in 1983. 

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This new social contract, that the taxpayer pays more for less, is arguably what’s driving voters to Nigel Farage’s populist Reform party which polling shows would top an election today. Covid’s fingerprints are all over this economic decay.

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What grates most for Leunig is that, almost three years since the UK launched its Covid inquiry, there is still no formal assessment of the economic response or any comprehensive cross-country comparison. Were nations with loose lockdowns like Sweden right? Should schools have closed? Britain’s health outcomes are hardly an endorsement, worse than Sweden, Germany, France and Spain.

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The inquiry has published one report on the UK’s resilience and preparedness, but nothing conclusive on the nine other “modules.” Former Prime Minister Rishi Sunak, who was chancellor in Covid and advised by Leunig, suggested on the BBC’s Political Thinking podcast in March the government had been too slavish in following the science. “All the decisions we made had trade-offs,” he says. “We should have spoken more openly about them. The broader reflection is, does our political discourse allow enough space for honest conversations?”

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The inquiry will stretch into 2026, lasting twice as long as Covid itself, and is projected to cost over £200 million, the most expensive in UK history. Leunig is expected to give evidence on the economic interventions at the end of the year. “How much am I going to remember?” he asks. “Memory plays tricks on us.”

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Covid waste

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Although his furlough program was credited with saving four million jobs, Leunig would be more sparing with handouts now. He would lower the salary limit to 70%, £1,750 in 2020, with a 20% contribution by the employer, replicating Germany’s Kurzarbeit upon which furlough was based. In all, he estimates it could have been £10 billion cheaper. Other policies were also flawed, leaving aside the £9.9 billion written-off on personal protective equipment. Altogether, Leunig identifies £50 billion of savings, a quarter of the economic response and about 2% of GDP.

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He blasts the £30 billion Self-Employment Income Support Scheme, which perversely lifted claimants’ income “above pre-pandemic levels” on average, the National Audit Office found. On the fraud-ridden £45 billion small business “bounce back” loan program, “I’m willing to see more firms go to the wall,” he says. There is “a special place in hell for capitalists who undermine capitalism,” he added about big businesses that kept hold of government support even as their sales rose.

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Perhaps most intriguing is the behavioral impact furlough may have had. Clare Lombardelli, the Bank of England deputy governor, has speculated that bailouts may be partly to blame for the weak recovery. The official government analysis is that furlough prevented economic “scarring” by keeping people tied to their jobs, preventing “hysteresis” where the long-term unemployed end up on the scrap heap.

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However, Jason Furman, former chair of then-president Barack Obama’s Council of Economic Advisers, argued at a Resolution Foundation think tank event in April that furlough may instead have killed the dynamism that drives growth. “We had much more separation from jobs in the US but productivity was better — and it might have been better because of that separation, not despite that separation,” Furman said. Lombardelli, at the same event, responded: “Does this mean we should rethink hysteresis? I think it does.”

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Leunig is skeptical but he and Lombardelli agree that too many questions remain unanswered. Lombardelli, a Treasury colleague of Leunig’s during Covid, called on researchers to look into the furlough conundrum. Leunig wants clarity on how best to tackle the next pandemic.

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For many, the pandemic’s legacy is personal. But it is personal economically, too, in the damage to living standards and public services. Leunig is impatient for answers. “The inquiry seems too parochial,” he says, “and it’s taking forever.”

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—With assistance from Andrew Atkinson.

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