The revolutionary new vision for a post-Covid Scottish economy

MacDonald’s proposals include moving “from shareholder to stakeholder capitalism” - recalibrating the economy so it’s fairer for ordinary workers. This would involve “the introduction of a wealth tax for high net worth individuals”.

“The pandemic,” MacDonald says, “has underscored and highlighted the many inequalities that exist in the UK.” GDP shouldn’t be the only measure of a nation’s success but also “health and social care, the environment, and the quality of life”.

Post-pandemic unemployment could be as high as 16%, MacDonald warns, and “is likely to be especially high in Scotland given the structure of the Scottish economy”.

“A new form of social contract will be needed as we move out of the pandemic,” he says.

The government should “instigate a wellbeing fiscal stimulus … that has a major focus on greening the economy”.

That means “no return to austerity policies”, and a focus on building “social capital” to create a stronger, more connected society. Simply focusing on growth, rather than human happiness, is not enough. 

MacDonald says: “The prioritising of health and wellbeing during the pandemic indicates that there should not be an exclusive focus on economic growth but a shift to a more holistic wellbeing measure; such a measure should recognise the deficiencies of the pre-pandemic economy in terms of inequalities, a reliance on relatively low paid and insecure jobs and a lack of resilience in health and social care.”

MacDonald’s call for such revolutionary change will be listened to by governments and policy-makers around the world given his distinguished background. He’s currently professor of macroeconomics and international finance at Glasgow University.

MacDonald, who is an OBE, has consistently been ranked amongst the world’s top 1% of economists. He’s worked with the International Monetary Fund, the European Commission, and the European Central Bank.

His paper will be published by the think-tank Policy Scotland. It’s titled “The Post Pandemic New Normal: the likely socio-economic implications and policy choices facing Scotland and the UK”.

MacDonald says: “The current dire straits engulfing the whole global community is unique in the sense that all governments are facing a stark trade-off between the health and well-being of their populations and maintaining the economic efficiency of their economies.”

The pandemic has also “exacerbated” the decline of globalisation as a “central component of the current world order”. The current crisis could be the “final nail in the coffin” of globalisation.

The economic threat from pandemic has been heightened by “a prolonged period of under-investment in developed economies”. The economic response to the pandemic by governments “has been uncoordinated”.

The threat of inflation is growing. “If inflation does start to take off then … there may at some point be a need to raise nominal interest rates sharply,” he warns, adding: “The focus would then need to switch to what public spending would need to be cut or what taxes to raise. Given that there seems to be no appetite for spending-induced austerity now, it would seem … that the time to start planning for eventual tax changes is now … specifically in terms of reforming the tax system.”

There’s likely to be “a reduced appetite for risk by the private sector and an increased risk aversion with increased precautionary savings on the part of consumers and low investment by business as a consequence”. Levels of debt are “eyewatering”. The “immediate impact of the pandemic” could see “a collapse in commodity prices”.

TAX REFORM

The damage to the economy from pandemic presents a stark choice: tax hikes or spending cuts. MacDonald says: “Given the austerity imposed after the financial crisis is one of the contributing factors to the lack of resilience in the health service and other public services during the pandemic we rule this out as an option. Which leaves taxes as the main vehicle to deliver rectitude in debt and deficit.”

MacDonald sees “the post-Covid landscape” presenting an “ideal opportunity to consider tax reform”. 

“It is crucial,” he says, “that any tax changes that are introduced should not impede the recovery and there seems to be a growing consensus among economists that any such changes should be focussed on wealthy individuals rather than increasing business taxes.”

Inequality has “been deeply intensified during the pandemic”. MacDonald says: “Perhaps, the time has now come for the stakeholder model of capitalism to replace the shareholder model.” Fifty years ago, 6.5% of corporate revenues went to shareholders - today it's 13%.

Post-pandemic recovery will “require taxes to change”. MacDonald says: “Given the large inequalities within the UK today any new system should be progressive and in large measure should avoid income and goods and services taxes.”

“To this end, a permanent reduction in labour taxes such as national insurance would clearly be an obvious alternative to the salary subsidies that have been given during the lockdown and would help to maintain employment levels as the recovery phase proceeds,” he says. 

“Furthermore, such a reduction in the tax wedge would give entrepreneurs the incentive to expand existing business and also invest in sectors that will become more attractive post-pandemic. It would be a mistake to pay for the lower taxes on labour by increasing corporation tax, given that an increased investment spend will be essential to permanent recovery from the recession.

“A wealth tax would be a credible tax on capital and is becoming increasingly popular particularly given the nature of inequalities prevalent in the UK.”

MacDonald also suggests a land tax as it “does not affect economic efficiency and can reduce inequality”. Business rates and council tax should also be reformed, and small and medium-sized companies should be assisted by grants not loans.

THE UNEMPLOYMENT CRISIS

Unemployment in Britain is likely to hit 10% by the end of the year, or even in the worst-case scenario reach 16%. MacDonald warns: “Given the structure of the Scottish economy, the unemployment situation in Scotland is likely to be worse than that in the UK.” Scotland’s dependence on the oil and hospitality sectors, and high-end food and drink exports, leave the nation vulnerable.

As well as “the permanent shutting of some businesses”, MacDonald worries about “the replacement of people with technology-driven alternatives”.

The “blight of unemployment”, he says, is “the inevitable consequence of the pandemic.”

As lockdown eases, “there is considerable uncertainty over whether people will ‘binge spend’ to release pent-up demand for goods … or will save as a precaution due to the uncertainty in the economy”. 

The job market will change dramatically. “People will have to train and retrain a number of times throughout their lives” and governments will have to help make that possible. 

Post-pandemic unemployment will “create greater inequalities in society”, mostly affecting the low skilled, those on low incomes and the young. The crisis risks “creating a ‘lockdown generation’ with permanent scarring”.

The “fracturing of globalisation … could also lead to a sharp fall in demand from abroad”. Governments will have to stimulate the economy by “increasing investment in infrastructure … such spending will, of course, have further implications for the fiscal deficit and public debt”.

RADICAL RECOVERY

Key to MacDonald’s vision of post-pandemic economics is “the greening of the Scottish economy”. This, he believes, “could generate many new jobs” in construction and energy. Climate change, says MacDonald, is the pandemic’s “twin”.

“Low-carbon-recovery could not only initiate the significant emissions reduction needed to halt climate change but also create more jobs and economic growth than a high-carbon recovery would,” he says.

MacDonald believes building ‘social capital’ - strong, positive connections between ordinary people - is another key to recovery. He cites the 10 million Britons who have volunteered to help during the pandemic. 

“Social capital is at least as important as human and physical capital in driving forward socio-economic progress, both in terms of GDP and of wider measures of prosperity such as wellbeing. However, the move in many western societies to individualism has led to a dramatic breakdown … of social capital.”

MacDonald adds: “Western liberal democracies have moved from societies based on the market to a market society, where the market governs our lives, and where a good, asset or service only has value if it is in a market and can be priced … In such a society, values such as solidarity, fairness, responsibility and compassion get downplayed and undervalued, if not totally ignored.”

The pandemic, however, has taught us that we can prioritise “health and wellbeing before economic efficiency”. There is also increasing evidence that people “would prefer to prioritise health and wellbeing and other societal values over economic growth once the crisis is over”.

“In going forward,” MacDonald suggests, “the UK and Scottish governments should not make GDP their exclusive target for the nations’ overall wellbeing.” Health, social care, the environment and quality of life also matter.

Governments need to “emphasise wellbeing creation as the ultimate goal of kick-starting productivity and growth, rather than a sole focus on wealth creation”. This would be a “major reprioritisation of our society”.

Governments should have been better prepared for a pandemic. “The appropriate form of resilience in the public and private sectors could and should have been in place,” MacDonald says, adding: “As in the case of climate change, the current epidemic did not happen by chance but as a result of mankind’s rapacious demand for global resources.”

Post-pandemic, “greater resilience in our health and social care systems” must be built in. The World Health Organisation should be strengthened to coordinate any response to future pandemics.

HOW LIFE WILL CHANGE

With “the demise of the current globalisation era”, countries will seek to be more resilient and self-sufficient at home. Building resilience in agriculture could led to innovations such as “vertical farming”.

However, “home bias” in other countries would have “repercussions” for the UK and Scottish export markets.

MacDonald predicts that the rise of working at home during the pandemic will alter the housing market, as well as “leisure, and the retail and hospitality sectors”. Home-working could also “reshape how people live and work in the central belt” in Scotland. This would have knock-on effects for the environment, the shape of cities, and road traffic as well as health and happiness.

“If a vaccine is not discovered and there are further mutations of this virus then there may be a steady migration from cities,” MacDonald suggests. This could have “important implications for house prices both in and out of the city and could lead to reduced inequality”.

Similarly, the shift to shopping online, e-learning in education, and also telemedicine will alter how we live and work.