Modelling the effects of pandemic control measures and financial support on businesses, regions and households
Lead Research Organisation:
Institute for Fiscal Studies
Department Name: IFS Research Team
Abstract
The economic consequences of the COVID-19 pandemic are far from over. Short-term interventions to contain the spread of the virus and its economic fallout are gradually being unwound. Now, as the lockdown is being lifted, attention is rightly turning to questions of which policies will best support firms, businesses and households in the medium to long-run. Over the coming months, the government faces a number of difficult challenges with long run implications, including how to reopen the economy safely, how and when to address its mounting debt burden, and how to ensure a sustainable economic recovery.
We propose two complementary, interlinked strands of research that will help the government navigate these challenges.
The first strand will build a sectoral-regional model of the economy. Our detailed model will incorporate several novel features that will allow to assess the impacts of very specific policy interventions, including financial support targeted to different industries, and relaxing or re-imposing social distancing restrictions in different areas. This will provide real-time, practical guidance to policymakers on the short and long-run impacts of different policies on output, investment, and employment in different sectors and regions of the UK.
The second strand of work will estimate a model of consumer behaviour to understand the effects of lockdown on households' spending decisions and living standards. This will allow us to understand how spending patterns change in response to lockdown measures and price changes, and how restricting the availability of goods affects household living standards (including differences across the income distribution).
We propose two complementary, interlinked strands of research that will help the government navigate these challenges.
The first strand will build a sectoral-regional model of the economy. Our detailed model will incorporate several novel features that will allow to assess the impacts of very specific policy interventions, including financial support targeted to different industries, and relaxing or re-imposing social distancing restrictions in different areas. This will provide real-time, practical guidance to policymakers on the short and long-run impacts of different policies on output, investment, and employment in different sectors and regions of the UK.
The second strand of work will estimate a model of consumer behaviour to understand the effects of lockdown on households' spending decisions and living standards. This will allow us to understand how spending patterns change in response to lockdown measures and price changes, and how restricting the availability of goods affects household living standards (including differences across the income distribution).
Publications
Alex Davenport
(2020)
Briefing note, The geographic impact of the pandemic on household spending
| Description | We have analysed how household spending was affected by the crisis. We found that the biggest declines in spending when the crisis struck in the spring were seen in the South of England - and the South has had the weakest recovery since, with spending in November still 7% below pre-crisis (compared with 3% across the country as a whole). Scotland and Wales, by contrast, have recovered to roughly their pre-crisis levels. When we examine the effects of specific public health restrictions, we find that shutting hospitality venues has quite small effects on total spending. While restaurant & recreation spending unsurprisingly does fall significantly, the decrease seems to be offset by increased spending on online retailers. But closing non-essential retail on top of that does cause a sizeable (5%) drop in total spending. It causes falls in clothing spending, transport spending and cash withdrawals, only partially offset by increased spending on groceries and (especially) online retailers. Since these retailers tend to only have a limited presence in the local area, the degree to which this substitution mitigates the effects of public health restrictions for local economies and high streets is likely to be modest. We have also analysed labour supply, imports and exports, and total output by industry for 2020 and 2021. We analysed the impacts of both the epidemic and Brexit. We expect the large reduction in labour supply induced by the epidemic to continue through the first 2/3 of 2021. Several sectors experienced labor force reductions of more than 20% (manufacturing, construction, accommodation and food services, wholesale/retail trade, transport, administrative support, and other services). In terms of exports, the pandemic lead to smaller reductions. However, these pandemic reduced reductions in trade were small compared to our forecast Brexit induced reductions in exports. In terms of total output, we simulated 2021 outcomes under 2 scenarios. Scenario 1 assumes a longer lockdown with output reductions in many sectors of 10-20% extending through summer 2021. Scenario 2 assumes a more rapid recovery in the second quarter of 2021. In both cases, the output lost to the crisis is far greater than output losses due to Brexit. We are currently using these results to compute the costs of alternative lockdown restrictions in 2021. |
| Exploitation Route | Building on our analysis of consumer spending, further work is needed to quantify the impact on consumer welfare and evaluate alternative government tax and spending policies. Building on our analysis of industrial output, we are modelling the finances of firms to evaluate bankruptcy. Further work can be done to evaluate alternative government spending policies, government investments in infrastructure, and regional development policies. |
| Sectors | Aerospace, Defence and Marine,Agriculture, Food and Drink,Chemicals,Construction,Digital/Communication/Information Technologies (including Software),Energy,Financial Services, and Management Consultancy,Leisure Activities, including Sports, Recreation and Tourism,Manufacturing, including Industrial Biotechology,Pharmaceuticals and Medical Biotechnology,Retail,Transport |
| URL | https://www.ifs.org.uk/publications/15229 |
| Description | Integrating Corporate Finance into Macroeconomics: Theory and Empirics |
| Amount | £245,685 (GBP) |
| Funding ID | RPG-2022-247 |
| Organisation | The Leverhulme Trust |
| Sector | Charity/Non Profit |
| Country | United Kingdom |
| Start | 01/2023 |
| End | 12/2025 |
| Title | Macroeconomic forecast tool |
| Description | We have developed software that forecasts labour supply, capital, imports, and exports for the UK economy. The software uses data from the UK Labour Force Survey and from the UK Quarterly accounts, to forecast these macroeconomic aggregates at the industry level. Forecasts are produced for 64 industries. The software, programmed in R, uses a LASSO regression to select the most important variables for forecasting each time series variable. After forecasting the variables, the software produces graphs showing how the industries are forecast to evolve. |
| Type Of Material | Improvements to research infrastructure |
| Year Produced | 2020 |
| Provided To Others? | No |
| Impact | We used the tool to forecast how the UK Economy would have evolved if there had not been a covid-19 pandemic. We then compare that forecast to the actual outcomes to estimate the net impact of covid-19 on each of labour supply, capital, imports, exports, and total output. |
| Title | UK Economy Compute General Equilibrium Model |
| Description | We have developed software to estimate economy wide productivity parameters for the UK economy and to then simulate the impact on the economy of changes in the economic environment. Using data from the UK Input Output Tables, the UK Capital Accounts, and the UK Labour Force Survey, our software estimates the parameters of a computable general equilibrium model. These parameters describe the productivity of labour, capital, and intermediate inputs in 64 industries in the UK. They also measure each industry's share of final consumption expenditure. The software tool also enables researchers to simulate the impact of economic changes on economic outcomes. For example, we used the tool to simulate how covid-19 induced changes in labour supply and in government restrictions led to changes in output for each of the 64 industries. The tool can be used to simulate how similar changes affect economic output, employment income, return on capital, and consumer welfare. The tool is programmed in Matlab. |
| Type Of Material | Improvements to research infrastructure |
| Year Produced | 2020 |
| Provided To Others? | No |
| Impact | We have used the tool to simulate the impacts of covid-19 and Brexit on the UK economy. We are using the tool to calculate the economic costs of alternative government policies related to covid-19 and to Brexit. |
| Description | Consumers are likely to draw down extra savings accumulated during the pandemic slowly rather than quickly |
| Form Of Engagement Activity | A press release, press conference or response to a media enquiry/interview |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Media (as a channel to the public) |
| Results and Impact | IFS press release |
| Year(s) Of Engagement Activity | 2021 |
| Description | KPMG Computable General Equilibrium modelling |
| Form Of Engagement Activity | A formal working group, expert panel or dialogue |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Industry/Business |
| Results and Impact | Since summer 2020, I have been working with KPMG economists to help them develop a computable general equilibrium (CGE) model, using the modelling tools developed on this project. KPMG is now developing a global CGE model to analyse and forecast the impacts of climate change and to analyse the government's net zero policies. |
| Year(s) Of Engagement Activity | 2020,2021 |
| Description | KPMG Covid Forecasting workgroup |
| Form Of Engagement Activity | A formal working group, expert panel or dialogue |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Industry/Business |
| Results and Impact | In support of their audit work, KPMG is required to forecast the macroeconomy so that financial sector institutions can forecast credit losses under various scenarios. In 2020 and 2021, I met with KPMG economists to help them develop methods to update their forecasts to address major structural changes induced by the covid-19 epidemic. The KPMG team is using some of the methods discussed to improve their forecasts of covid-19 impacts. |
| Year(s) Of Engagement Activity | 2020,2021 |
| Description | Seminar presentation to civil servants |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Policymakers/politicians |
| Results and Impact | On January 20, I presented results from this research at an online seminar organised by the ESRC and HMRC. The seminar was attended by more than 100 civil servants from a range of government departments. I held follow up discussions with several policymakers to explain how our results help them understand the impact of changes in government subsidies, investments, and labour market policies. |
| Year(s) Of Engagement Activity | 2022 |