The UK Government’s Economic Response to COVID-19

COVID-19 originating in late 2019, posed a gruelling and tragic existence globally, taking the lives of over 6 million people in just a few years of its first recorded case. Consequently, it issued critical challenges to global economies, leading to unforeseen measures aimed at rectifying the everlasting effects of COVID-19. Experiencing over 20 million confirmed cases of the virus, it is evident the UK government had to act accordingly to stabilise the nation with both short and long-term actions. But what exactly was done by the government following the development of the virus in the UK?

Cuts In VAT and Business Cost

On the 8th of July 2020, the government announced a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation from the standard rate of 20%, to effect from 15 July 2020. The reduction in prices for goods and services encouraged struggling households to spend, stimulating economic activity through increased consumer spending and providing a source of revenue for businesses severely affected by forced closures and social distancing measures. This was accompanied by an Eat Out To Help Out scheme — where from the 3rd to 31 August 2020, people got a 50% discount when they ate in restaurants that are registered with the Eat Out to Help Out Scheme. Registering an £840 million cost to the government, the scheme helped boost consumer demand for newly opened businesses thus protecting over 2 million jobs following the relaxation in restrictions. Whilst it is hard to analyse the effect of the scheme on the number of COVID-19 cases, studies from the CAGE research centre at the University of Warwick, found areas where the scheme’s discount was used had led to an increase in new COVID-19 infections a week after it came into force.

Furlough Schemes

Applied from 1 March 2020 and ending on 30 September 2021, the furlough scheme played a pivotal part in both providing financial support to businesses and offering financial security to workers. With around 11.7 million jobs on the scheme throughout its existence, it was tasked with temporarily subsidising a significant portion of employee’s wages during forced closures or reduced demand, subsequently limiting the cost to businesses and households. Whilst providing job security and a source of income for the labour force, it additionally helped prevent bankruptcy and loss of revenue for businesses during the economic downturn caused by the pandemic and lockdown. Costing upwards to £70 billion, the scheme forestalled a spike in unemployment, thus stopping short and long-term implications to the UK economy However, its effectiveness in targeting individuals and businesses most vulnerable to the challenges of COVID-19 was questioned as it was believed certain sectors with operations less affected by the pandemic received nonessential support, incurring an unneeded cost to the government.

Interest Rate Reductions

On 19 March 2020, the Bank of England announced it had cut interest rates to 0.1%, the lowest it had ever been. With a clear initiative to cut costs faced by businesses and households in the UK, the measure incentivises borrowing thus prompting investment by businesses and spending by consumers. Subsequently, the reduced cost helped maintain operations and retain jobs by reducing production costs,hence enabling economic stability. Moreover, homeowners on tracker rates, whose mortgage repayments follow changes to the bank rate, were directly supported by the reductions as their mortgages became cheaper. According to the financial information service Moneyfacts, for someone who has a £100,000 mortgage balance to pay over 25 years, both cuts should mean their mortgage gets about £30 cheaper each month, representing substantial aid in a period of financial struggle and

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Educational Support

With schools closed across the UK, it was imperative to continue to provide education to students. In a £4.84 million scheme, the UK government launched Oak National Academy — an online learning platform delivering lessons — which helped cater video lessons with a broad range of subjects up until year 11. Since then, over 128 million Oak lessons have been viewed by pupils across the country hence continuing to provide education away from schools. Following the slow reopening of schools, the Prime Minister and the Education Secretary announced the £1bn Covid Catch Up plan to tackle lost learning time. This ‘package’ helped tackle the problem, through the fund of £650 million shared across state primary and secondary schools starting from the 2020/21 academic year. With clear consideration for lost time in education, the support catalysed swift academic progress by providing influential educational resources to help recuperate back to pre-pandemic education. Independently, a National Tutoring Programme, worth £350 million, was also introduced to provide significant access to high-quality tuition for disadvantaged young people, a programme which was instrumental in preventing major disparity in knowledge between peers. Since then, over 227,000 pupils have been enrolled to receive tutoring with over 25,000 tutors involved in supporting pupils across the UK. Following the eventual return to more familiar school routines, further aid was provided to help continue the government’s pledge to help schools catch up on what they missed during the pandemic, totalling to £3 billion investment in the educational sector. Yet, the report — Education Recovery in Schools in England — highlights how the disadvantage gap is growing despite the measures put in place. In the summer of 2021, secondary pupils were 2.4 months behind expected reading levels. Meanwhile, after the key stage 2 SATS last year, the disadvantage gap index (a measure of the difference in attainment) was 3.23 compared to 2.91 in 2019. This may be because schools were given freedom to decide which pupils should benefit from the various tutoring options and the NAO reports that 51% of the students who received tutoring in 2021/22 via the tuition partners pathway were disadvantaged, compared to the Department for Education’s target of 65%. Meanwhile, only 48% of those receiving support via the academic mentor’s pathway were disadvantaged. This figure falls to 47% for students on school-led tutoring interventions. This suggests that the government’s investment in the National Tutoring Programme failed to target the most disadvantaged children that were hardest hit by the pandemic, creating an opportunity cost as the £350 million spent on the programme could have been used differently in a scheme more centred around the most disadvantaged children, which could have been aided by enhanced monitoring and research. The impact of the failure to meet the Department for Education’s target of 65%, is increased inequality (a government objective) as the attainment gap grows between peers causing long-term costs to the government and households.

In conclusion, the UK government’s economic response to COVID-19 displayed a collection of fiscal and monetary policies aimed to conform to the impacts of the pandemic including cuts in VAT, furlough scheme, interest reductions and education support. While these measures were instrumental in providing immediate crucial support to individuals and businesses, it is clear that there are long-term implications of sudden and turbulent measures such as public debt, substantial borrowing and severe economic downturn. Additionally, the UK government faced criticism for their failure to act quickly during the outbreak of COVID-19 as there was an absence of a clear approach to tackling the effects of the virus. Overall, however, it is clear the estimated £310 billion to £410 billion cost of the government’s Covid-19 measures, was pivotal in aiding a vulnerable economy and country.