COVID Changes Everything

Abstract

AbstractThis chapter explores how the 2020 outbreak of the COVID-19 pandemic radically shifted the parameters of ‘sound’ economic policy, and grappled with the limits of economic forecasting in the face of radical uncertainty. Situating the pandemic within Britain’s broader recent history of intersecting economic shocks—including the Global Financial Crisis (GFC) and Brexit—the chapter uncovers how sustained crisis and uncertainty have caused the Office for Budget Responsibility to significantly rethink how it evaluates, models, and forecasts the UK economy. While the GFC raised questions about the potential stabilizing role of active fiscal policy, the pandemic consolidated the case in favour of large-scale state intervention, designed to stave off much worse economic outcomes. Amid COVID, the OBR eschewed assumptions of smooth cyclical adjustments in preference for economic models that gave great weight to potentially non-linear dynamics such as deep slumps, economic ‘scarring’, negative spirals, and ‘doom loops’, and the necessity of economic policy responses to them. This paved the way for the OBR’s more positive evaluation of the ‘battlefield medicine’ of the government’s unprecedented bold and fiscally activist COVID responses and interventions. Showing how COVID shifted the tectonic plates of fiscal rectitude and responsibility, the chapter illustrates how economic thinking and forecasting practices are buffeted—and potentially transformed—by historical conjuncture, crisis, and unexpected events. The changing politics of post-COVID UK fiscal rectitude are indicated by the OBR’s rethinking of fiscal space, and its views on the economy’s equilibrating properties in what might be a more crisis-prone ‘new normal’.