A new report from from the Adam Smith Institute accuses the Office of Budget responsibility of downplaying the lasting risks of the ongoing economic shutdown and challenges the government to come up with a plan for after the end of the lockdown.

The Think Tank says that the longer the lockdown, the more businesses will run out of cash, lose hope, and shut down. This will cause substantial unemployment, the extent of which may currently be hidden by the ability to furlough employees.

It says that the OBR’s scenarios are underestimating the network effect of the economy and the risk of systemic economic decline if lockdown is sustained.

The UK is behind countries across Europe including Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic in developing a plan to exit lockdown.

Lives versus livelihoods’ is a false dichotomy, a strong economy is what keeps people fed, housed, and ensures we can afford quality health services.

They argue that the challenge of reanimating the economy after the lockdown has not been fully understood because of the interconnected nature of the economy.

Ordinary people looking to their own finances, jobs, and businesses take quite a different view. According to a recent YouGov poll: just 11% think the economy will bounce back quite quickly, 42% say it will be worsened for a few years and a further 41% say the economic damage will be much more long term.

The impact of the lockdown grows deeper and faster over time, with each business that closes causing knock-on issues for their staff, suppliers and customers, shareholders and creditors.

The more businesses that fail, the more in turn come at risk and pass their risk onto others — just like how a virus can multiply through a population.

High profile businesses like Debenhams, Laura Ashley, and Flybe that have already called in administrators will be the tip of the iceberg, says the think tank, as it warns that these businesses will pass on disruption to other companies integrated into their offer to clients or reliant on their custom.

The longer that a lockdown goes on, combined with the slow rollout of emergency grants and commercial loans, the more businesses will run out of cash and be forced to close.

The country’s 5.9 million small and medium firms are most at risk. The British Chamber of Commerce has found that a majority (57%) of businesses have three months or less in cash reserves, while 6% of firms have already run out of cash. Unsurprising when we think just £8.7billion of the £330bn in emergency loans announced by government have been paid out.

A phased plan would allow companies to assess the feasibility of their operations and calculate the worth of borrowing; the longer lockdown continues, the less feasible an option this is. The greater the systemic loss of industry and mass unemployment, the deeper the risk of depression and the harder any economic recovery will be.

The think tank stresses that the government should only begin lifting the lockdown following the advice of clinicians that the outbreak is under control. However they argue that the clinical priorities need to be set and stated much more clearly: not only so that people know why the economic pain must be endured, but to allow debate on how much economic pain should be endured in return for the clinical benefits.

Countries across Europe including: Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic have announced reopening strategies and even timelines; Britain is falling behind and businesses are being held back from planning at the most crucial moment.

Dr Eamonn Butler, Director of the Adam Smith Institute and co-author of the report, said:

“The dislocation that is ripping through the economy because of lockdown is like the virus ripping through the population. Each business failure produces many more, just as each infected person infects many more. Unless you get to grips with it fast, things soon escalate out of control. Business failures, bankruptcies and unemployment rocket. So we have to lay plans for how we are going to unwind the lockdown, and do it now.”

Matthew Lesh, Head of Research at the Adam Smith Institute and co-author of the report, said:

“The limbo must come to an end. The closure of one-third of the economy has been necessary to slow the spread and protect the health service — but it cannot last forever. We need a route out of this mess: a strategy to protect from this virus while allowing life to progressively return to normal. This will mean testing and tracing capabilities ramped up, maintaining physical distance in shared spaces, but allowing as many businesses as possible, as quickly as possible, to reopen their operations.”


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