SUNAK WRESTLES WITH CRISIS
The Chancellor is taking another huge gamble but in truth the support on offer is far less generous
There will still be subsidies for wages. Soft loans for companies will be continued. The selfemployed will get some extended help, and some of the tax breaks will remain in place. On the surface, Rishi Sunak is still shaking the magic money tree and offering huge amounts of support to protect the economy as lockdown restrictions are reimposed.
And yet, the Chancellor is taking the second huge gamble of his short time in Number 11. First time around he bet that he could put the economy in deep freeze for three months. This time he is wagering that a wave of creative destruction will reshape the economy and get us through to the moment when a vaccine finally arrives.
In truth, the support is far less generous than in the first round. Companies that can’t operate normally while the epidemic is still out of control will have to start making redundancies. Loans will start to be pulled, and businesses that were in decent health in last year will find they can’t survive until the end of this one. Unemployment will inevitably start to climb. Hopefully with enough demand, new businesses and new jobs will emerge. If so then the British economy will emerge in better shape than many of its rivals, and with lower debt loads as well. But it is also a huge risk – and if it goes wrong the price will be a high one.
The upsurge in Covid-19 infections this month demanded a response from the Chancellor. True, hospitalisations and deaths remain relatively subdued. For now, however, the Government clearly feels it has no choice but to put restrictions back in place. The pubs will shut at 10pm, and the numbers will be restricted. Restaurants will be forced to accept far fewer bookings. Offices that were tentatively thinking about reopening will have put that back on hold with fresh guidance to work from home where possible, and the sandwich shops and coffee bars in city centres that were looking forward to the return of the lunchtime trade will now realise they are on hold for a lot longer.
As for Christmas, with gatherings restricted and parties unlikely, that now looks like a washout as well. Where once we hoped for a V-shaped recovery, we will now have to settle for an L – and we will have to hope it is not some form of an I that just plunges downwards forever.
The Chancellor needed to step in. If businesses deserved support in April because they couldn’t operate normally, then logically they need support in September as well.
And yet, Sunak is being far less generous than he was six months ago. The furlough scheme is still coming to an end next month. In its place, the Government will pay only a percentage of salaries for staff who are back to working part-time, and that support will be targeted at specific sectors and at smaller companies.
That will save some jobs, but by no means all of them. A nightclub owner won’t have any choice but to lay off workers. Pubs will make many people redundant. So will most of the employers in the commuter economy. There isn’t any point in paying the wages of people who don’t have any work to do and not many businesses would survive if they did. The result? A million or two million of the workers on furlough could find they don’t have a job. The hospitality sector will get a bit of extra help with the reduction in VAT extended, but the impact of that will be marginal. Meanwhile loans to companies will be extended under a new “pay as you grow” scheme. But beyond that, there is not very much. Companies will have to figure out how they can survive as best they can.
Compared to other countries, it is a
bracing package. Germany, France, Italy and Spain have all extended their versions of the furlough scheme well into next year. Germany and France in particular are spending big on industrial support, protecting both existing businesses, and launching big new investments to create demand and jobs. The European Union’s Coronavirus Rescue Fund will mobilise €750bn (£686bn) to spend on green energy and other projects to support the economy.
In Britain, by contrast, the support will be relatively modest. Sure, there will be plenty of people who criticise that. But it is not completely crazy. A lot of the money thrown at supporting workers was going to zombie workers at zombie companies. Many retailers were in deep decline already, and so were many of the malls and retail parks that depended on their rents. Covid-19 has merely accelerated a demise that was inevitable anyway.
Likewise, companies were shifting towards flexible and home working even if the epidemic has accelerated that. There is no point in keeping companies alive forever with public money when they don’t have much of a future anyway.
Even more of the money that in Europe will be thrown at new industrial strategies will end up being wasted on expensive white elephants (green energy is great, but there are only so many solar panels and electric car batteries the world needs and we are heading for massive over-capacity). Our modest package, by contrast, will cost far less, and be far less ambitious.
The Chancellor has unleashed the “destruction” part. The question is whether the UK economy can do the “creative” part.
There are some encouraging signs that it can. Professional and services companies have adapted already to home working, and it now seems that lawyers, designers, consultants, bankers and engineers can all work effectively in a home/office hybrid with lower costs and superior productivity. Some retailers have adapted to home delivery brilliantly, and will be stronger for it once this crisis is over. In truth, if Rishi Sunak has called this one right, the UK will emerge stronger than it was before, if not in absolute terms then compared to our main rivals. It will be leaner, far more digital, more flexible, and with lots and lots of new, growing businesses. It will have far less debt, and so won’t need massive tax rises down the line to pay back all the money spent on furloughs and investment.
The trouble is, if it is wrong the UK will be left with mass unemployment, a generation of workers with few skills, and a shrunken and emaciated economic base. It is a huge gamble – and one we will all have to hope the Chancellor has got right.
‘Compared to others, it is a bracing package. Germany, France, Italy and Spain have all extended their furlough’
‘If it is wrong the UK will be left with a generation of workers with few skills, and a shrunken, emaciated economic base’