The cost
On the cost side the lowest resources cost is just to count the GDP that
would have been produced in 2020 but for the lockdown established in
March and assuming the lockdown to be eased from the end of June. This
assumes a rapid bounce back by the end of the year so there is no effect
on incomes and output from the start of 2021 onwards. That was the
scenario envisaged by the Bank of England in their May 2020 assessment
of the economic outlook when they put the GDP loss in 2020 at around
14%. The OBR estimate for lost output in 2020, also based on an assumed
rapid recovery in the second half of the year, is close to 13%. It
seems plausible that a large fraction of these estimates of lost output
is due to the lockdown. But even absent a government-mandated lockdown
there would have been some reduction in incomes. If the lockdown effect
was two thirds of what the OBR and Bank of England suggest is the loss in GDP for 2020 that might imply around a 9% fall in GDP as a direct result of it. That is around £200 billion.
That 9% of GDP cost is likely to be a low-end estimate of overall
costs of the UK lockdown from mid-March to early June as it:
- assumes lost output from the first half of 2020 comes back quickly-in fact, the lasting effects of job losses in the UK seem very
substantial. Typical estimates are of a lasting wage penalty from
unemployment of 8-10% and an employment penalty of 6-9% (Arulampalam
et al. 2003, Tumino 2015) and the impacts are particularly severe for
young people.
- ignores wider health costs of future lives damaged – in fact,
recent work by, among others, Carol Propper, professor of economics at
Imperial College, and researchers at the Institute for Fiscal Studies
(IFS) suggests that the relatively modest increases in unemployment
associated with the 2008-09 financial crisis may have resulted in
900,000 more people of working age suffering from chronic health
problems. See Propper et al (2020).
- assumes zero costs from disruption to the education of the young –in fact, such costs are likely to be significant. Paul Johnson,
Director of the IFS, in an article from late May said: “Younger
generations “will pay a heavy price for our response to this virus”.
So say Anna Vignoles and Simon Burgess, perhaps Britain’s foremost
authorities on the economics of education. They are right, and we
should be worried. They are talking about the effects of school
closures on children’s education and the effects of the deepest
recession in history on the job and earnings prospects of those young
people entering the labour market this year. These effects will be
damaging, long-lasting and felt much more acutely by those who are
already disadvantaged.” (The Times, May 26th)
At the high end of the spectrum would be an estimate of 15% of GDP lost
in 2020 and lower output for the next few years on top of that as
economic activity does not return to normal for several years with some
firms permanently damaged by the lockdown and the large rise in
unemployment slow to be reversed, even if restrictions are quickly
removed from mid-2020. A shortfall of GDP of 15% in 2020; 7.5% in 2021
and 2.5% in 2022 would be at the more pessimistic end of the spectrum
for the impact of the March-June lockdown, though for many economists
such a figure seems realistic rather than pessimistic. The cumulative
lost output would then be 25% of GDP.