Economic impact of coronavirus: gaps in support and economic analysis Contents

---

3Economic analysis

77.In our second report on the The economic impact of coronavirus: the challenges of recovery, we concluded:

It is too simplistic to say that a compulsory lockdown is a trade-off between the people’s health and the economy. The very presence of the virus, and how people respond to it regardless of what the Government mandates, has an economic impact. And lockdowns don’t just affect the economy—they have health implications as well, positive and negative, beyond just combatting coronavirus.82

78.This Chapter explores:

• the current Government analysis of the economic impacts of social restrictions along with the transparency of the Treasury in publishing its existing analysis;
• the potential of cost-benefit analysis and epi-macro modelling to inform Government decisions on social restrictions, as well as the need for the Treasury to produce a counterfactual on what would happen to the economy if the virus were allowed to spread without restriction;
• the role economic modelling can play in future Government decisions as the vaccine is rolled out and the Treasury’s capacity for modelling and joint working with other departments in this area.

Government analysis of economic impacts of social restrictions

79.In July 2020, the ONS, the Department of Health and Social Care, the Home Office and the Government Actuary’s Department produced an analysis of the benefits and harms of the first lockdown in their paper: Direct and Indirect Impacts of COVID-19 on Excess Deaths and Morbidity. This was updated in September 2020 and once again in January 2021.83

80.That paper84 estimated the number of excess deaths in England from coronavirus, changes to the healthcare system, and lockdown measures. Its main findings are:

• 61,000 excess deaths85 may have occurred between March and September 2020, and 100,000 additional excess deaths may occur under an assumed Winter Scenario86 between October 2020 and the end of February 2021.
• The greatest number of excess deaths in the short-term (until March 2021) is likely to be seen in direct COVID-19 deaths. However, approximately 40,000 excess deaths may occur in the longer term (up to 50 years) as a result of economic impacts from the recession.
• There could be an additional 97,000 excess deaths in a counterfactual which assumes little or no Government intervention, compared to the Winter Scenario over a three-month period between the end of December 2020 and the end of March.87

81.On 30 November 2020 the Government published its Analysis of the health, economic and social effects of Covid-19 and the approach to tiering.88 The document was produced in response to requests for a cost-benefit analysis of the tiered restrictions to be introduced in England on 3 December. It stated that “while it is not possible to forecast the precise economic impact of a specific change to a specific restriction with confidence, it is clear that restrictions to contain COVID-19 have had major impacts on the economy and public finances”.89

Treasury transparency

82.There is evidence suggesting that the Treasury has carried out analysis on the economic harms of social restrictions but has not published it. The minutes of the fifty-eighth SAGE meeting on Covid-19, held on 21 September 2020, referred to work led by the Chief Economist to analyse the economic impacts and associated harms of all interventions, alongside the epidemiological assessment:

All the interventions considered have associated costs in terms of health and wellbeing and many interventions will affect the poorest members of society to a greater extent. Measures will be urgently needed to mitigate these effects and to achieve equity and social justice, some of which could be introduced relatively quickly. Policy makers will need to consider analysis of economic impacts and the associated harms alongside this epidemiological assessment. This work is underway under the auspices of the Chief Economist.90

83.On 3 November 2020, we wrote to the Chancellor requesting that the analysis referred to above of the “economic impacts and the associated harms” be published.91 The Chancellor responded:

HM Treasury does not prepare formal forecasts for the UK economy, which are the responsibility of the independent OBR. They will publish their next forecast on 25 November. In addition, within their statutory mandates, the Bank of England’s Monetary Policy Committee (MPC) and Financial Policy Committee (FPC) produce analysis including short-to-medium term scenarios and projections which reflect their independent judgements regarding the impact of Covid-19 on the likely path of the economy and UK financial stability. The MPC will update their projections in the upcoming Monetary Policy Report which will be published on 5 November.92

84.When pressed by the Chair on the work referred to in the SAGE minutes the Chief Economist of the Treasury, Clare Lombardelli, told the Committee that the Treasury undertakes economic analysis as part of the policymaking process, but “a specific forecast or a specific prediction of the impacts does not exist.”93

85.We are disappointed at the lack of analysis provided by the Treasury, despite such analysis being referenced in the SAGE minutes. Without it, the impression is that the Government is making important decisions without proper regard to all their impacts, both on health and the economy. The lack of such analysis also prevents the public from understanding in full the basis for, and impact of, the restrictions imposed upon them.

86.We call on the Treasury to be more transparent about the economic analysis which it undertakes to inform Government decisions in the fight against coronavirus and to publish any such analysis in a timely manner. The House should not be asked to take a view on proposals which have far-reaching consequences for the general population, such as those involving restrictions on social interaction, education, movement and work, without the support of appropriate and comprehensive economic analysis.

Cost-benefit analysis and epi-macro modelling

87.We have also explored the use of epi-macro modelling.94 The Governor of the Bank of England described epi-macro modelling as aiming:

to jointly model the multiple interactions between the spread of Covid, the restrictions imposed by governments to contain that spread, and the economic impacts of the restrictions and of behavioural responses to the virus itself. Consequently, it can attempt to answer questions about the economic costs and benefits of different public health policies.95

88.A Bank of England briefing goes into greater detail of epi-macro modelling:

The starting point for epi-macro is the compartmental SIR model.96 This workhorse epidemiological model has three different compartments (Susceptible, Infected and Recovered) and models how individuals transition between them. Epi-macro models extend these models in two ways. First, the spread of the virus is no longer assumed to be exogenous but is instead affected by individuals’ behaviour, for instance consumers might not visit restaurants as much if they fear becoming infected while dining. Second, the linking of a simple model of production and consumption model to the progression of the disease facilitates predictions of economic variables. Though simple, these epi-macro models generate qualitative results with clear policy relevance.97

89.In a letter to the Chair on 26 January 2021, Sir Tom Scholar, Permanent Secretary at the Treasury, said that “the Treasury has studied the outputs of the academic literature on epi-macro modelling very closely” and that the Treasury had “incorporated the insights into our analysis”.98 However he also expressed caution about the models: “while epi-macro models provide valuable insight into how changes in one variable can affect outcomes elsewhere in a highly complex system […], they rely critically on assumptions on parameters—which, in the absence of previous experience or extensive data sets, can only be assumptions”.99

90.We agree with the Treasury that epi-macro modelling relies on assumptions which may not be supported by extensive data sets. Nevertheless, we believe it would be a useful exercise for the Treasury to undertake epi-macro modelling to better understand the implications of Government-imposed social restrictions and to evaluate the costs and benefits of such social restrictions.

The missing counterfactual

91.In evidence to the Committee, three economists, Professor Ben Moll, Professor of Economics, London School of Economics, Dr Flavio Toxvaerd, University Lecturer, Cambridge University, and Ian Mulheirn, Executive Director, Tony Blair Institute for Global Change, criticised the Analysis of the health, economic and social effects of Covid-19 and the approach to tiering published by the Government on 30 November 2020, for not providing a counterfactual of what would happen in economic terms if the virus were to continue without restriction. They argued that: “While the HMG document qualitatively explores the health consequences of not acting, it fails to address the central question of how the economy would perform under such an alternative”.100

92.They pointed out that voluntary social distancing could have a significant impact on output:

If people respond to the increased prevalence of the virus by avoiding social consumption—visiting shops, cinemas, theatres, pubs and restaurants etc.—so as to minimise their risk of catching the virus, controlling the spread may entail only limited economic damage and, in particular, less damage than what a naïve comparison of economic outcomes to their pre-pandemic level would suggest.101

93.The OBR also notes that international evidence collated by the IMF “suggests that official lockdown restrictions and voluntary behavioural responses (social distancing) made roughly equal contributions to the fall in output.”102

94.Ian Mulheirn told us that he believed that the impact of the Treasury not modelling the counterfactual was that the third lockdown had been implemented too late:

If we had put that high R number into any estimate of the impact of the virus on the economy, you would probably have seen that the economic consequences of not acting would have ended up being larger, either because we needed a bigger lockdown for longer—which is what we are now in—or because we did not act at all and therefore the fear factor got bigger and bigger. Either way, the consequences of late action were always likely to be significant.103

95.A model he produced in November 2020, combining both epidemiological and health data, indicated that:

reverting to September-style restrictions on 3 December can be expected to cause a third spike in cases and deaths, that peak in February and March respectively.104

96.The ONS, Department of Health and Social Care, Home Office, and the Government Actuary Department’s analysis of the benefits and harms of the first lockdown in their paper: Direct and Indirect Impacts of COVID-19 on Excess Deaths and Morbidity emphasises that its “estimates cannot be used to evaluate the impact of measures put in place to control the transmission of COVID-19” because there is “no established way in government of determining the degree of voluntary social distancing in the absence of government intervention and the impact of this on the economy”.105

97.In a letter to the Chair on 26 January 2021, Sir Tom Scholar told us that:

to estimate the economic effects of changes in restrictions also requires knowledge of what would have happened to the path of the virus and the economy with different restrictions, or no restrictions. Unfortunately, the evolution of the virus and the restrictions required to mitigate it has changed over time, and given the complex interactions between the two, it is not possible to know with any degree of confidence what would otherwise have happened. Any assessment of a given change to restrictions is therefore unavoidably only partial in nature.106

98.The Treasury’s analysis has been criticised for not providing modelling of the alternative to lockdowns. There is evidence to suggest that in the absence of lockdown, people would have socially distanced to a large extent through fear of viral transmission and infection. As such, while a lockdown is a significant and costly imposition by Government, that cost when compared to the alternative with voluntary social distancing, may be less than many assume.

99.We strongly urge the Treasury to provide rigorous analysis of future policy choices which quantifies the harms and benefits of each of the plausible range of alternative policies. It has always been considered a good practice to publish an impact assessment for every measure that the Government proposes.

Impact of vaccine roll-out

100.The Government aims to offer vaccines to the over-70s, healthcare workers and those required to shield by mid-February 2021. These groups have so far accounted for 88 per cent of COVID-19 fatalities. By autumn 2021, the Government expects that the rest of the adult population will be vaccinated.107

101.On 27 January 2021, the Prime Minister told the House that in the week commencing 22 February, subject to the full agreement of the House, the Government intends to publish a “plan for taking the country out of lockdown”.108 He said:

At this point, we do not have enough data to judge the full effect of vaccines in blocking transmission, nor the extent and speed with which the vaccines will reduce hospitalisations and deaths, nor how quickly the combination of vaccinations and the lockdown can be expected to ease the pressure on the NHS.

What we do know is that we remain in a perilous situation, with more than 37,000 patients now in hospital with Covid, almost double the peak of the first wave, but the overall picture should be clearer by mid-February. By then, we will know much more about the effect of vaccines in preventing hospitalisations and deaths, using data from the UK but also other nations such as Israel. We will know how successful the current restrictions have been in driving down infections. We will also know how many people are still in hospital with Covid, which we simply cannot predict with certainty today. We will then be in a better position to chart a course out of lockdown without risking a further surge that would overwhelm the NHS.

When I announced the lockdown, I said that we would review its measures in mid-February, once the most vulnerable had been offered the first dose of the vaccine, so I can tell the House that when Parliament returns from recess in the week commencing 22 February, subject to the full agreement of the House, we intend to set out the results of that review and publish our plan for taking the country out of lockdown. That plan will, of course, depend on the continued success of our vaccination programme, on the capacity of the NHS and on deaths falling at the pace we would expect as more people are inoculated.109

102.It is as yet unclear how the vaccination of the vulnerable will affect people’s fear of the virus and their appetite for social interaction and consumption. Ian Mulheirn said that although deaths amongst vulnerable groups can be eliminated:

[what] we don’t know is the extent to which the fear factor in the wider economy and among working-age people and consumers is contingent on the fear of other people dying versus the fear of getting the virus themselves and the nasty effects it can have.110

103.He argued that the key to “build confidence among consumers to come out again […] is to commit [to]ensuring that that R number does not go back up”.111 He thought that even at this stage, the Government could set out criteria for when the economy could re-open and:

put out some plans contingent on a set of assumptions and say, ‘This is what we would expect to happen, and of course if the R number does go above 1 or the thresholds for virus prevalence are met, this will be delayed.’ It should be possible to set out some contingent plans at this point for how they should proceed.112

104.He also said it should be possible to use economic modelling to guide the timing of when restrictions could be lifted in order to optimise health and economic well-being:

It should be possible to set out what the economic costs over the whole of 2021 would be under a given easing plan, and what the health implications of that plan would be. And it should be possible to optimise those things. That is something where the Government would specify the staging of when restrictions would be lifted and the SPI-M modellers113 could say what that would be likely to do to the prevalence of the virus, the R number and so on. Then, the Treasury, the OBR or some economic modellers can take a view on what different levels of the virus and different levels of restrictions would do to economic activity. By putting all those things together, you should be able to optimise that and come out with what is best for the combined concerns of the country in terms of health and economic wellbeing.114

105.While death rates from coronavirus are high, the rationale for Government decisions on social restrictions is well understood by the public. As the vaccines roll-out proceeds and death rates fall, Government decisions on whether or not to lift restrictions will become more finely balanced. We believe that economic analysis and modelling is essential to inform those decisions, alongside evidence of the other necessary infrastructure such as test, trace and isolate, and responses to new variants, being comprehensive and in place to mitigate against the need for a further lockdown.

106.After almost a year of restrictions on social and economic activity, the general public and the business sector need confidence that the Government has as clear and as certain a route out of the crisis as possible.

107.On 27 January, the Prime Minister told the House that when Parliament returns from recess in the week commencing 22 February, the Government will set out a “plan for taking the country out of lockdown.” We recommend that in order to provide some certainty to businesses, as well as to the general public, the forthcoming Government plan for taking the country out of lockdown should set out criteria for how and when it will lift restrictions—this could be in terms of the prevalence and R rate of the virus. We recognise that this would be a contingent plan, based on the stages only being activated after milestones are met, with the Government providing the maximum possible certainty. Alongside this plan, the Treasury should also provide the combined economic and epidemiological modelling to support it, and show how it would best optimise health and economic outcomes.

Joint working

108.Other economists expressed concern that the epidemiological work and the economics work has been undertaken in a “siloed fashion”.115 Tony Yates, adviser at Resolution Foundation and Fathom Consulting, stated:

You have had SAGE forecasting the epidemic without taking account of economics and you have the Treasury doing things in private without taking account of the epidemic, because they cannot. They have economists who do not know how to do this. The same is true of the Office for Budget Responsibility, the Bank of England and dozens of other economic outfits.116

He argued that what is needed is “an institutional device that brings researchers and policy advisers together to build a set of fused analytical tools where one can study these things”.117 He suggested: “There are intertemporal trade-offs, and these things can be worked out, exposed, and even somewhat depoliticised so that there are a menu of things that are put on the table for MPs […] to actually make intelligent choices”.118

109.Professor David Miles, Professor of Financial Economics at Imperial College Business School, concurred:

We need a joint group of experts who know about viruses and can make a rational assessment of the wider effects policies may have on the economy and on health in the future. The group then, like SAGE itself does, could come to a common view amongst themselves as to what the best advice for Government would be.119

Professor Gigi Foster, Director of Education of the University of New South Wales Business School in Australia, agreed: “Economists should be part of the debate, along with other experts such as psychologists and social workers.”120

110.The Treasury has told us that it has benefited from its observer status in SAGE, but it is not clear how economic analysis has impacted on Government decision making process.121

111.It is vital that economists work together with epidemiologists and health experts to make decisions on social restrictions, and that the output of their work should be made public. We propose that the Government use a more multi-disciplinary approach to examine the health and economic costs of social restrictions without delay, and we recommend that the Government should put more information in the public domain as to how economic and health factors have been taken into consideration regarding Government decisions on social restrictions. How the Government made decisions on social restrictions is an area that might be expected to come under further review in any future public inquiry into the Government’s effectiveness in combating coronavirus.

Treasury’s capacity for modelling

112.In our second report on the economic impact of coronavirus, we voiced concern about the erosion of Treasury’s modelling capacity:

The Treasury’s macroeconomic forecasting ability appears to have eroded since the formation of the OBR. The Treasury needs to maintain sufficient forecasting capacity outside the OBR so that it can ensure that it can adapt policy responses rapidly to an urgent situation.122

113.Even though the Treasury was involved in the paper Direct and Indirect Impacts of COVID-19 on Excess Deaths and Morbidity,123 which did model some of the health implications of the first lock-down, it was not listed as one of its authors.

114.We strongly believe that the Treasury needs to retain greater modelling capacity outside the OBR, so that it can model the implications of different policies. It should also ensure that it has sufficient capacity to modify or use new types of modelling techniques where necessary. We recommend that the Treasury produces a policy document that sets out what its modelling capacity should be and what modelling it should be expected to carry out and publish, independently of the OBR. This is especially important in times of crisis, when the Treasury may rapidly roll out programmes without the benefit of OBR analysis.