Investment Clock insights

UK: A model of COVID-19 economic policy coordination


Melanie Baker

12 March 2020

With the coronavirus continuing to damage the outlook for the global economy, I have been wanting to see a mixture of ‘bridging’ support for companies and households and outright stimulus measures in economies.  That is what we got in the UK – where the UK  benefits from a central bank with wide ranging responsibilities and a government with a large majority

Policy actions recently announced by the Bank of England and the UK government, broadly speaking, are larger in scale than I’d expected at this point. They do not mean that the UK will avoid a downturn, but they bode well for the UK’s ability to get through this crisis without long-term damage to the economy and to recover robustly afterwards (putting Brexit to one side for the moment).   

The BoE announced a set of coordinated Covid-19 measures to support the economy:

- They cut rates by 50bp, to 0.25% (close to their professed lower bound), voting unanimously

- They announced a new term funding scheme with “additional incentives” for banks to lend to businesses and households, especially SMEs.

- They reduced the counter-cyclical capital buffer from 1% to 0%.

- The Prudential Regulation Committee (PRC) also set out “supervisory expectations” that banks should not increase dividends/bonuses in response to these policy actions (i.e. they should be supporting the real economy directly instead).

The Chancellor announced a substantial Covid-19 package against a backdrop where the UK had already added significant near-term fiscal stimulus in the Autumn 2019 Spending Review.  The Chancellor pledged to do “whatever it takes” to support the economy.  

- As hoped for, the Chancellor’s focus was on more money for the NHS and on ‘bridging’ measures for companies and households. There was a £7bn support package for households/businesses and a £5bn emergency response fund for the NHS. For workers and households, the measures are designed to reinforce the social security safety net. For businesses, there were a number of measures which should again support SMEs in particular through this crisis, including reimbursing statutory sick pay in full for companies with fewer than 250 employees.

The Chancellor also announced what amounts to a significant generalised fiscal stimulus, lasting well beyond temporary measures to address the coronavirus outbreak, including a ramping up of net investment spending and more money for day-to-day public sector spending.  Net investment, for example, goes from 2.2% GDP in 2019/20 to 3.0% net investment as % GDP by 2022-23 and then stays there (so ‘maxing out’ the government’s fiscal rule for net investment).  Most of the additional spending will be funded out of borrowing, i.e, is not fully offset by measures that raise government receipts.  The balance of tax and spend may change once we get through the crisis and there is plenty of detail to come on all the planned additional spending. In a fiscal sense, this is only the first instalment of a trilogy (there is a Spending Review and another Budget to go yet this year).

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.