Great Britain

It’s pay-back time – affluent older generation must cough up to deal with post-pandemic debt

Having spent the last few weeks travelling in Scotland, Yorkshire, London and on the South Coast, my overwhelming impression was of an optimistic country emerging from hibernation, enjoying seemingly “normal” behaviour and economic activity.

The question I ask is how deep the optimism is, especially for young people, who bore the brunt of the lockdown. They have night clubs and football matches back but what about their interrupted studies and mental health? This is an issue I explore with former minister David Willetts, former NUS president Shakira Martin, and social mobility expert Deborah Streatfield, in the first of a series of podcasts launched this week.

But first, how real is the macroeconomic recovery? Thanks to mass vaccination and relaxed rules, there is economic revival in the US and Europe. The UK is exceptionally gung-ho and independent economic forecasters, as well as the IMF, expect growth of 7 per cent in 2021.

The optimism is based on the reopening of the service sector for shopping, leisure and work. In addition, the more affluent (and elderly) can now spend their accumulated savings. And we shouldn’t underestimate what Keynes called “animal spirits” as positive thinking becomes contagious and energises business to invest and grow.

But we should not get carried away. The UK economy will still be 3 per cent smaller than was expected before the pandemic. Production remains badly affected by enforced isolation resulting from “pings” on the NHS app. The “test and trace” system which failed in the early stages of the pandemic is now in overdrive and is having to be desensitised.

There is also a lot of anecdotal evidence that people are being cautious in their behaviour rather than rushing back to “normality”. That caution is no doubt prompted by the fact that the UK hasn’t “defeated” Covid but is choosing to live with it, meaning that there will be continued scares and, perhaps, new restrictions, especially if new variants appear.

Furthermore, the cash balances accumulated during lockdown may not be spent on goods and services. A lot of money is being channelled into other assets, especially property. Throughout the developed world there has been a boom in property prices which, in the UK and the US especially, were already too high and are now at levels which seem seriously overvalued on any metric. The effect is to create a big barrier to house purchase and rent for younger people, and to store up problems for those who do buy if rising interest rates cause prices to decline again.

Then there are labour shortages. Brexit has undoubtedly contributed to a shortage of workers in hospitality and other sectors where Eastern Europeans were a significant part of the labour force. This should be good news for those entering the labour market for the first time but for those seeking a career other than being a barista or bouncer, there are serious barriers of inadequate training and lack of job experience.

Another problem is that export markets are weak for a variety of reasons. For the UK there is the self-inflicted damage from leaving the EU single market which is already becoming apparent in the deluge of red tape engulfing the services sector. The Eurozone is recovering but Southern Europe is being badly hit by the impact of the Delta variant in shutting down tourism, while German manufacturers are reporting serious supply problems.

Australia is back in lockdown mode. Southeast Asia, one of the most dynamic parts of the world economy, is in the middle of a pandemic wave. Japan, as reluctant host of the Olympics, is struggling with a big outbreak and is largely unvaccinated. Earlier stars of pandemic management like Taiwan and Korea are trying to contain new outbreaks.

An even bigger worry is over the emerging markets in general. India is now thought to have suffered four million or more fatalities. Hopes that the country would see a rapid recovery, lifting hundreds of millions from extreme poverty, are receding fast. Brazil is another humanitarian tragedy combined with economic casualty, and its experience is being replicated throughout Latin America. The prospect of higher interest rates to come in the US means that they could soon be facing capital flight and currency crises. For the poorest countries, the nightmare is just beginning.

The United States is key to the speed and trajectory of global recovery. A couple of weeks ago there was a serious fear of “overheating”, leading to pressure on the Federal Reserve to raise interest rates as a coolant. Suddenly the Delta variant has sent the process into reverse. And the intensifying “cold war” with China means that priority in both countries is creating domestic “security of supply”, reducing their interdependence and – in so doing – their respective capacities to pull along an ailing world economy.

The big story is that the world’s poorer and younger countries are going backwards. After several decades in which, helped by globalisation, their growth (and China’s) led the world economy, they are likely to fall behind again with slower growth and growing poverty levels. The absence of a serious global vaccination effort makes that inevitable and it will boomerang on the richer world when new variants emerge against which there is no current immunity anywhere.

Meanwhile, though the UK and US are set fair for several months of rapid growth, and growing confidence as we emerge from lockdown measures, there are red flags waving in the distance, not just failing economies elsewhere but homegrown problems too.

UK public debt is now around 100 per cent of GDP. Some of us would argue that this is not a matter of great concern just now with market interest rates very low (10-year government bonds carry interest rates of 0.7 per cent, well below the growth of the economy). But the Treasury is not so relaxed, and we have already seen in the spending decisions on overseas aid, Universal Credit and catch-up schooling that “austerity” is back.

There is also a warning flag about the country’s long-term future. Our success or otherwise as a country will depend on human capital: people. “Building back better” involves investing heavily in the generation which took a disproportionate hit from the period of lockdown. My first podcast episode seeks to probe what is happening in the universities, colleges and in the labour market. The conclusions are not all negative: universities in recent years have managed to support more and more diverse students; the neglected FE sector is nonetheless remarkably innovative; there are remarkable success stories in deprived communities. And the pandemic has been a catalyst for introducing new learning methods, for which many had been crying out for years.

But there is little sign yet that my generation, whose welfare has been the focus of heroic efforts by the NHS and economic lockdown, realises that this is pay-back time. The brunt of dealing with post-pandemic debt, and in keeping the education budget growing, must surely now fall on the affluent old.

Opening night clubs may be a potent symbol of economic recovery and renewed freedom, but nights out do not buy anyone a future. The only real remedy to the pandemic hangover is sustained investment in young people: their individual success or failure is the hinge on which the collective future of the country hangs.

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