Is it really impossible to do an economic analysis of the impact of Covid tiers?

The government claims it can’t do a cost-benefit analysis of coronavirus restrictions because of the uncertainty involved. Ben Chu looks into whether that stands up to scrutiny

A cost-benefit analysis traditionally weighs up the costs of a particular policy action with its benefits – yet the government has resisted doing one for coronavirus restrictions (Getty)

The government’s decision to put much of the country into more restrictive Covid tiers after the end of lockdown on 2 December has led to demands for ministers to release a formal economic impact assessment of the policy.

And the Covid Recovery Group – a group of backbench Tory MPs opposed to stringent lockdown restrictions – had called for a full cost-benefit analysis of the three-tier system.

A cost-benefit analysis (CBA) traditionally weighs up the costs of a particular policy action with its benefits.  

So, for instance, a proposal to build a new rail line – the cost would be the public expense of building the infrastructure and the benefits would be the time saved by travellers and other effects.

In the context of the Covid tiers system, the cost would be the negative impact of the restrictions on local businesses – such as pubs, restaurants and shops and their workers – and the benefits would be factors such as fewer infections, fewer deaths and reduced strain on local hospitals.

Conservative MPs have been demanding a CBA because they suspect that the economic costs of putting certain regions, with relatively little Covid, into higher tiers of control would outweigh the health benefits – and if they are wrong they would like to see the evidence.

Meanwhile, the Treasury Select Committee has also been pushing since well before the current lockdown for the Treasury to release its internal assessments of the economic impact of putting different parts of the country into different tiers because it believes MPs have a right to see it before voting on such legislation.

Yet the Treasury has stonewalled these requests, insisting such studies have not, in fact, been undertaken.

And the government released a document on Monday which effectively claimed it was impossible to do a cost-benefit analysis of coronavirus restrictions because of the uncertainty around what would happen to economic activity if they weren’t imposed.

“Given the unprecedented nature of both the virus and the restrictions that have been required to mitigate it, it is not possible to assess the balance of these effects,” it said.

Ian Mulheirn of the Tony Blair Institute, a former civil servant and someone who has created his own interactive cost-benefit model of Covid restrictions, does not find this credible.

“It is eminently quantifiable,” he says.

“Sure, there is huge uncertainty and we’ll never know for sure. But it’s not as though the Treasury doesn’t spend all its time operating in that kind of environment.

“Anybody who has worked at the Treasury will have been engaged with costing things that are hugely uncertain and trying to put monetary values on things that are very difficult to pin down, based on limited evidence, and this is really no different.”

The International Monetary Fund (IMF) produced a paper recently which estimated the extent to which economic activity earlier in the year in various countries was crushed by, on the one hand, government lockdown orders and, on the other hand, spontaneous social distancing by cautious populations, finding that around half was attributable to the latter.

Mulheirn argues that the IMF report shows it’s perfectly possible for the Treasury to do this kind of analysis.

“You’d have a look at the literature, you’d have a look at the range of estimates of what’s voluntary and what’s due to restrictions and come out with a assumption and then model it on the basis of that,” he says.

Yet Giles Wilkes, a former special adviser to Theresa May and Vince Cable, who is currently a senior fellow at the Institute for Government, has more sympathy with the Treasury’s position and is sceptical of how much value a CBA would add.

“Whereas the infection side of equation is kind of easy to conceptualise, I don’t think the GDP side is,” he says.  

“It’s one of those circumstances where GDP is sort of meaningless.”

Given the government is imposing restrictions in the knowledge that it will create short-term economic disruption, Ian Mulheirn thinks ministers will have implicitly done a cost-benefit analysis of Covid restrictions – and has manifestly judged that the health benefits outweigh the economic costs.

But Mr Wilkes isn’t so sure ministers will have thought about the policy in this way.  

Anybody who has worked at the Treasury will have been engaged with costing things that are hugely uncertain and this is really no different

Ian Mulheirn, Tony Blair Institute

“My suspicion is the prime minister just mentally imagines what the hospital system would look like if we went South Dakota [the US state with some of the worst per capita death rates in the world], and that’s just existential – imagine how many cancelled operations there would be,” he says.

“I’m guessing he thinks the health risks just silence the GDP risks. That’s not something he puts a number on.”

It’s worth noting that many Tory MPs seem to be demanding not only a broad cost-benefit analysis but a specific analysis of the impact of different tiers in different areas.

Even advocates of CBA analysis think this is unrealistic.

“I don’t think any cost benefit analysis the Treasury could do would reasonably be able to go into very local differentiation in that way,” says Mulheirn.

“That seems to come into much more of a judgement about how the virus spreads – the risk of spillover from one region to another. The thing we need the Treasury to answer is in principle does it make economic sense to control the virus or not. It’s then down to public health experts to determine how to control the virus. That seems to me to be the question that the Treasury has not answered.”

So why not? What’s going on?  

Some think politics could be at play. Those close to the chancellor seem to have been briefing that he is hostile to restrictions and that he resisted a second lockdown. That has created the mood music that has encouraged many Conservative backbench rebels to challenge the tier system.

Given the kicking they got from the Brexit analysis [released in 2018], there would be a low degree of trust in what they’d show.

Giles Wilkes, Institute for Government

It’s striking that Michael Gove, the Chancellor of the Duchy of Lancaster, argued on Tuesday that a resurgence of the virus would in itself be damaging for the economy (because people would spontaneously curb their spending and consumption if the epidemic took off again), but the Treasury has not made that same point.

Yet if the Treasury really does disagree – and thinks the harm is greater than the help – it would arguably in its interests to release any research which backs that up.

There could be a tension between ministers and civil servants, with ministers more in favour of lower restrictions than their officials.

Yet both Wilkes and Mulheirn also suspect a pessimistic calculation on the part of ministers about how any analysis they produced, regardless of its message, would land with MPs.

“One possibility is they are worried because there is no particularly firm evidence on this that if they rely on the argument that letting the virus slip out of control would affect the economy they may get shot down for that. Whereas if they just say 200,000 people might die they’re less likely to get shot down,” says Mulheirn.

Wilkes says trust could a factor. “Given the kicking they got from the Brexit analysis [released in 2018], there would be a low degree of trust in what they’d show.”

To that extent, the government’s tiers CBA headache might be regarded a symptom of a more serious illness in the body politic.