US president Joe Biden is in the news for his proposed $1.9 trillion stimulus package aimed at revitalising the United States’ economy. He is right to extend economic rescue measures which will help the US economy recover after the pandemic and support struggling families. Closer to home, the planned UK stimulus is less than a quarter of that envisioned by the US, adjusted by the size of the economy. But we estimate that an ambition similar to that of the US would be needed to get the economy back on track, otherwise the UK economy risks falling into a ‘stagnation trap’.
Countries that have sustained significant reductions in economic activity as a consequence of the coronavirus pandemic are faced with a similar challenge: will the economy bounce back on its own through pent-up demand, or will it require a stimulus? Our analysis suggests a similar answer to that reached by the US president; that too small a stimulus risks a sluggish recovery and could bring permanent economic scarring as a consequence.
Building on our previous work on stimulus, we argue Rishi Sunak should pass a bold recovery plan worth £190 billion or 8.6 per cent of GDP. So far, he has committed about 2 per cent of GDP. Our proposed measures would be targeted at supporting those firms and households hardest hit by the pandemic, invest in public services and help the growth of ‘future-proof’ industries and jobs. At this March’s budget, the chancellor should look to his transatlantic counterparts and pass support measures commensurate to the size of the economic peril the UK is in.
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