The Chancellor, Rishi Sunak, is skating on incredibly thin ice. He is gambling that his £30 billion spending package will be sufficient to transition the furlough scheme to something like the full-employment economy which existed before the shut-down in March. But the odds against this happening are huge.
For one thing, as Labour’s Anneliese Dodds pointed out, COVID-19 has had worse health effects – and inflicted more damage – on the UK economy than in any of our comparators. The depletion of state capacity to respond effectively to the health crisis has left a legacy of mistrust and fear which will make it exceptionally challenging to “kick start” the economy quickly.
Let me concentrate on the most important aspect. Ending the furlough scheme in October means that the government will no longer pay the wages of nine million workers. That means that either the firms on whose books they remain will have to start paying them, or they will be made redundant. Rishi Sunak has offered a “son of furlough” incentive to employers, so as to avoid mass redundancies. Until January, companies that pay the wages of furloughed workers will receive a £1000 bonus for each one.
However, whether it will be worth it for employers to resume paying their workforce (even with the £1000 bonus) will depend on the demand for their goods and services, that is, on what happens to consumption over the next few months.
And this depends on two things: how quickly the supply-side of the economy can be reopened and how soon people are ready to resume their old shopping and recreational habits. The two are of course connected: the easier it is for people to shop, go to pubs, cinemas, and theatres, stay in hotels and eat in restaurants, the more they will be ready to do so. But it also depends on their psychological willingness to risk infection.
The government’s ineptness in handling the health crisis will thus impact both the supply and the demand sides of the economy. The precautionary regulations affecting distancing, masks, crowd numbers and travel will still remain in place as long as the threat of new waves of infection remain: indeed the failure to develop a viable “test, track, and isolate” system means that the threat will stay longer than necessary. There will also be less appetite for some kinds of spending under these conditions. This means that even with the best will in the world, consumption will remain awkward and constricted in many sectors of the economy.
But the fear of contact, created by the propaganda which justified mass lockdowns, will also be a powerful limiting factor. A quarter of parents have said they will not send their children back to school in September. This fear of contact is bound to limit the business of all those companies whose industry depends on contact, especially hospitality, travel and recreation. Even £10 off the restaurant bill in August, as promised by the Chancellor today, is unlikely to induce a mass resumption of eating out in our large towns and cities.
The Chancellor’s measures, which include VAT reductions, and financial incentives for training, apprenticeships, house buying, and energy-saving are welcome. But they are a holding operation. I do not see how they can prevent a haemorrhage of jobs after October. The real choices will come with the Autumn Budget.
The choice will essentially be whether to continue with the financial orthodoxy of recent years which denied a state “mission” in investment or job creation or whether to use the immense fiscal power of the state, which, when circumstances demand, is perfectly capable of keeping households provisioned through a months-long standstill of private enterprise, to transform the subsidy culture into a new lasting partnership between the state and the people.
This piece is cross-posted from: Catholic Herald
Photo credit: Flikr/HM Treasury
