14-15 - Special Report

The COVID-19 pandemic has forced the government to take steps that will damage the economy, which could have a significant impact on healthcare funding in future.

At the start of this year, it seemed as though Brexit was going to be the main challenge for the UK pharmaceutical industry in the coming 12 months. How times have changed. While Brexit negotiations continue – at least for now – their importance has paled compared to the global challenge of fighting off COVID-19, the novel coronavirus first identified in China. The prime minister, Boris Johnson, has even refused to rule out asking for another extension.
The change of focus is understandable given the COVID-19 related panic now gripping the country. Until mid-March, the UK government was noticeably slower than its European counterparts to introduce strict quarantine measures, arguing that it was important to wait until the time was right to avoid ‘pandemic fatigue’. That changed after a research report from Imperial College warned that a lack of action could lead to 510,000 deaths in the UK and 2.2 million in the US. Rarely has a piece of academic research been so influential.
With the most vulnerable now urged to self-isolate and the rest to use social distancing, most of the population is working from home; most schools are closed and panic-buying has stripped supermarket shelves. The government’s priority is to prevent an overload on NHS services and protect the elderly, who are most at risk from COVID-19. Sir Patrick Vallance, the government’s chief scientific adviser, said that keeping excess deaths from the disease below 20,000 (compared with 8,000 for flu) would be a good result.

Economic hit
However, all this has to be weighed against the damage that quarantine measures are already doing to the UK economy. According to the UK Office for National Statistics, transport, accommodation, distribution and food service together account for roughly one-seventh of UK GDP – and most of those businesses will now have to close for several months, putting workers out of jobs. There will be knock-on effects on other services sectors, and the effect would be even worse if the UK has to bring in more stringent lockdown measures.
In China – which contained the disease by implementing a lockdown in hotspots such as Hubei province and lighter quarantine elsewhere – The Economist Intelligence Unit now expects GDP to have contracted in real terms in the first quarter of the year. We expect stimulus to bring growth of just over 2% for the whole year, down from a forecast of 5.9% previously. The US should still eke out growth of 1%, down from our previous forecast of 1.7%. But it is highly likely that Japan, France, Germany and Italy will report full-year recessions, with the UK vulnerable as well.
As in most countries, the UK government is trying to mitigate the economic damage. On March 17, a day after announcing the quarantine measures, the chancellor, Rishi Sunak, announced a series of loans and a relief package for targeted industries of £330 billion ($396 billion), far more than the £12 billion he had already promised in his March 11 budget. Businesses can call on six-month interest free loans, or £25,000 grants, or a business rates tax holiday, while households get a three-month mortgage holiday.

Fiscal pressures
Altogether the package is worth around 15% of GDP – the biggest fiscal expansion since the second world war – but it does little for the unemployed, gig-economy workers and renters, who have been promised a second package. There is also the small matter of debt. Most of the support takes the form of loans or repayment holidays, but in the end that debt will still need to be paid. A cut in interest rates will help, as will the fall in global oil prices (the UK is a net oil importer), but the interest-rate cut will also hurt bank profits. The government, too, will rack up its debt levels, which currently stand at 85% of GDP.
Italy is in a far more vulnerable situation. Not only does it have the highest number of COVID-19 deaths in the world, but its government debt stands at 136% of GDP. But the UK will still have a hard time recovering from the economic damage inflicted by coronavirus. All the more so, given that it was already expecting considerable economic damage from Brexit, particularly if it fails to agree good trade terms with the EU by the time the transition period is currently due to end, at the end of December 2020.

Healthcare funding
So what does all this mean for healthcare spending? Well, in the short term, it will clearly need to rise to cope with the crisis. Health equipment, testing equipment and healthcare workers are badly needed, almost regardless of cost. If we are lucky, the NHS will also need to pay for a COVID-19 vaccine or treatments in future. Even if the disease is contained, extra funding will be needed to continue to make up for the backlog in care, including all the non-urgent operations that have now been postponed. More broadly, there will be public and political pressure to ensure that healthcare systems, and particularly critical care units, are in a fit shape to cope with any future pandemic (or even a seasonal return of COVID-19).
However, government budgets will be under pressure once the economic damage is done, and that will include healthcare. Priorities will change, and that means that parts of the system may see funding cuts. In the last financial crisis, it was pharmaceuticals and public health spending that took the brunt of cuts. This time round they could be casualties again, but so too could areas such as mental health – which recently got a big funding boost. One area that we would hope will not be under pressure is old-age care. If this crisis has shown one thing, it is how vulnerable elderly people are when diseases spread.