Policy related to the Covid19 pandemic has entered a very delicate phase, from both medical and economic perspectives. The UK and Scottish Governments have taken somewhat different approaches. The UK approach could be deemed more cavalier and the Scottish more prudent. How these approaches work out in terms of the future developments related to the pandemic will determine whether the more risk averse Scottish approach will prove beneficial or not in the medium and longer term, so far as the economy, unemployment and indeed the public finances are concerned.

To simplify markedly, the UK Government is permitting a more rapid and wider spread return to work and the earlier re-opening of businesses across a broader spectrum. This has led some Scottish manufacturers to claim that the fact that their businesses will open later than those down south places them at a disadvantage. They will be less well placed to compete for domestic and indeed international business as economies bounce back.

Likewise those on furlough in Scotland are likely to have to wait longer before they can return to their jobs – provided these still exist. Indeed the delay adds to the risk of businesses collapsing and jobs disappearing. Also the furloughed individuals will be dependent for longer on state support, and subject to the uncertainties of the extent of that support, given that the Scottish Government will have to bear the strain of lengthier furlough as compared to other parts of the UK.

From a public finance perspective, most of the costs to date – i.e. of furloughing and the business interruption loan scheme in particular – have been UK-wide measures. Hence they have either fallen to the UK purse or have been fully compensated in Scotland via the Barnet formula. If Scotland determines to furlough for longer, or to compensate a higher % of wages than elsewhere, then that cost will fall to the Scottish Budget. Similarly if Scotland were to adopt a more liberal approach on the business interruption loan scheme or provide further support to business, the self-employed or others facing costs because of a more protracted move out of lockdown, then those costs would be for Holyrood not Westminster.

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This all suggests that the potential consequence of that more protracted withdrawal from lockdown could be more problems for business in Scotland along with risks of higher unemployment here and a longer period of uncertainty for individual employees and hence households. There would also be higher costs for the Scottish exchequer, placing additional strains on the public finances which already face their most traumatic (highest debt:GDP ratio) ever period outside of war years.

But as we all know life is not as straightforward as that. The economy south of the border could be on one of a number of tracks, depending upon how successful the government there is in a achieving early unwind without deleterious effects – i.e. without a bounce back in cases or even a second spike. There is always the possibility that moving too early to unlock will result in more cases (and deaths) and lead to a return to lockdown and enhanced rather than reduced delays in achieving economic regeneration.

If the UK has moved too early, and if the Scottish Government’s caution leads to slow but steady recovery, then the prudent approach will pay economic and financial dividends, as well as saving suffering and lives. Businesses would return to activity in a more stable environment. That should imply a better outlook for jobs and job security. Business investment should bounce back more substantially and speedily and enhanced consumer confidence should result in a stronger recovery so far as consumption is concerned – providing a further ratchet to economic growth.

So far as the public finances are concerned, the cautious approach will have higher front end costs. However, if the Scottish judgement is vindicated, then these will be more than offset by two factors. First, Scotland would avoid the extra costs involved in dealing with the return of Covid 19; (although Holyrood should still receive the Barnet consequentials of required expenditure in England.) Second, more rapid and steadier economic growth should mean a more pronounced bounce back in personal and corporate tax revenues.

Nobody knows who has got it right – and the risks of a pandemic return remain however slowly the lockdown is released; (as exemplified by what is happening in South Korea and elsewhere.) The economic and fiscal impact will be horrendous even for the country whose government times a return to normality impeccably. However, the case for caution is as clear to a risk-averse economist as it must be to the medical expert.

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Whatever may transpire governments must now plan the way forward to stimulate the economy post-pandemic, but also think afresh on the type of economy they seek to promote in the years ahead. The key to stimulation will be a broad brush approach to supporting businesses. This must involve UK government measures implemented in Scotland as well as Scottish-specific measures (e.g. diverting the embryonic Scottish National Investment Bank to a key role in economic recovery), productive engagement from the financial services sector and encouraging an acceleration in the deployment of risk finance.

The diverse impact of the pandemic has displayed graphically the scourge of inequalities in our society. We need to readdress priorities, but to do so by engaging society in the round. Then we must specify our new priorities clearly and develop policies which have the combined effect of encouraging sustainable economic growth and working towards a more equitable Scotland. That sounds like enough challenge for the time being.