Policy Research in Macroeconomics

This time, Mr Sunak has got it wrong

Image with acknowledgment to The Korea Herald

Till now, I have supported much of what Chancellor Rishi Sunak has put in place, as measures to help the economy through the pandemic.  The furlough scheme has proved its worth.

But today’s measures are inadequate and disappointing.  The new Job Support Scheme, under which the government will pay some 22% of the wages of employees who work at least one third of their usual hours.  This compares with the 60% of wages to be paid by the government in October, the last month of the furlough scheme.

According to the Financial Times, the monthly cost of the new scheme might by around £1 billion, compared to £4 billion per month for the furlough scheme (at October levels).  For the remaining 5 months of the year, that makes less than £5 billion, compared to the £20 billion likely cost if the furlough scheme were extended.  At 2019 levels, £20 billion is a little under 1% of GDP.

The cost of the whole of the “winter economic plan” (which includes VAT reduction measures etc. also) would be around £10 billion maximum, or less than half a per cent of GDP.

The Chancellor’s argument, set out in his Statement, is that “Our economy is now likely to undergo a more permanent adjustment.”

That is very likely to be true – and many of us have long argued that a permanent “structural adjustment” of the UK economy is essential, if we are to be fit (and fitted out) for the future, able (for example) to deal with climate change, control the finance sector, and provide far greater economic and social equality.

Mr Sunak continued,

“The sources of our economic growth and the kinds of jobs we create, will adapt and evolve to the new normal. And our plan needs to adapt and evolve in response.  Above all, we need to face up to the trade-offs and hard choices Coronavirus presents… The furlough was the right policy at the time we introduced it…. It provided immediate, short-term protection for millions of jobs through a period of acute crisis.

But as the economy reopens it is fundamentally wrong to hold people in jobs that only exist inside the furlough. We need to create new opportunities and allow the economy to move forward and that means supporting people to be in viable jobs which provide genuine security.”

There is however a huge weakness in his argument.  We have not had time to see how the virus will affect us for the longer term, and numerous industrial sectors – of which the arts, entertainment and recreation are the prime example – remain closed or highly restricted because of measures put in place by government (with good cause, for the greater part).  If they have to remain closed for long periods, then it may be unreasonable to expect their employees to remain as such, at government expense.  But if – for example – a vaccine is available in 6 months’ time, then these industries can re-emerge, perhaps reshaped, but not destroyed – provided that there are still businesses and still a workforce in place.  In short, for at least some industries, and probably for all, an extension of the furlough scheme till the end of March would be a far better option. And that indeed is why the Chancellor has delayed his budget – because he needs more time to see how the crisis evolves (see FT article here).

Although the level of vacancies has risen from its April low, it is still below the low levels reached in the Global Financial Crisis, as per this recent ONS chart:


This means that it is highly unlikely that there will be jobs sufficient to provide work, or decent work, for many of those “released” by the process of not-very-creative job destruction that is still likely to follow the end of furlough. This means, further, that there will be reduced spending power in the economy, as the number of unemployed rises.

And although retention of the furlough scheme would add around one per cent of government spending (or around half a per cent more than the new Job Support Scheme) to the end of this financial year, £20 billion is quite small set against the total coronavirus spending so far.  And today, let us note, the government borrowed  £3,000 million of 0⅛% Treasury Gilt 2026 with a marginally negative yield…

And insofar as Mr Sunak is right, and there is a process of “more permanent adjustment”, what is required is not the untrammelled, unseen working of the free market, which will seek to revert to old patterns of exploitation, but a process through which the government helps to shape, through its climate and industrial policy leadership, the direction and evolution of that adjustment.  With the UK chairing the UN Climate Change Convention ‘COP 26’ conference in Glasgow in November 2021, we should take COVID 19 as the wake-up call for a truly permanent ‘adjustment’.

But mindlessly destroying the creative arts and sports sectors along the way would be an act of senseless vandalism, not of ‘adjustment’.  ‘Creative destruction’ must not mean the ‘destruction of creativity’.

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