Britain faces a tsunami of unemployment

Extraordinary times call for extraordinary measures from the Chancellor to get the country back to work

It was good to see so many young people celebrating Super Saturday at the weekend. But this was not Britain springing back to life or a return to normality. The young may have been out and about but many older people remained at home. Not all pubs and restaurants reopened, and those that did were often operating at well below normal levels.

There has been a lot of debate about which letter of the alphabet will best describe Britain’s economic recovery when it happens: V, L or U? The chief economist at the Bank of England says the data indicate a V-shaped recovery. There are also hopeful signs internationally. In the US, a record 2.7 million jobs were added in May. What was forgotten was that the US shed more than 20 million jobs in April.

Here in the UK, there may be some firms that enjoy a V-shaped recovery. Others, in hospitality, aviation or on the high street, face a mountain to climb. So we may find ourselves with an economy that gets back to 90 per cent of where it was before, but with that 10 per cent gap having a continuing depressing effect. Already a number of well-known names have gone bankrupt. Many more will follow, including small firms discovering that they can’t repay debts run up during lockdown. Defaults on loans will hit the banks and their ability to lend.

The Chancellor, Rishi Sunak, will deliver an economic update tomorrow, including details of his recovery package. What should he announce for this unprecedentedly difficult situation? He will no doubt confirm the Government’s commitment to large increases in infrastructure spending. That is welcome but infrastructure projects are rarely “shovel ready” and will do little for the most pressing problem: the imminent threat of a tsunami of unemployment.

The furlough scheme has been hugely successful in taking 9.3 million off the unemployment register. But how many millions will find they still have jobs when the scheme ends in October? Some fear unemployment could rise to 3 or 4 million. Mervyn King, the former Bank of England governor, has suggested the scheme should continue. But that would be extremely expensive and give the wrong sort of incentive. We are paying people not to work when we should be paying to get them back into work.

The best way to encourage employment is to reduce the cost of employing people. The tax cut we need is the temporary abolition or reduction of Employers’ National Insurance Contributions, perhaps limited to particular sectors. An alternative would be direct cash payments to firms to maintain or increase employment. If we don’t act, the worst hit will be the young. This year’s school leavers could be next year’s long-term unemployed. They will need support with training, apprenticeships and advice.

Some would argue the priority should not be to protect existing jobs but to create new jobs in industries of the future. But governments do not create jobs, businesses do. What was created by the Government was the lockdown that led to the recession. There are many job losses and bankruptcies that would not have happened but for the Government’s action. So the Government has a moral obligation to those whose problems it created. As long as the restrictions on business continue, the Government should continue its support.

Others argue for a temporary cut in VAT to bring forward spending. But that is prohibitively expensive: each percentage point costs £6.8 billion a year and the small change in shop prices would hardly be noticed.

Tomorrow is not a Budget and there are constraints on what the Chancellor can announce. A cut in stamp duty would help to stimulate the housing market but that will probably have to wait until the November Budget. Further, the best way of getting a V-shaped recovery – the lifting of all restrictions – is not in Mr Sunak’s gift. Any repeat of lockdown would be disastrous and even local lockdowns risk damaging business confidence.

Nevertheless, extraordinary times demand extraordinary measures. We need to move beyond the recovery stage to long-term expansion led by the private sector. The Government should set the framework, forget all about a so-called industrial strategy and let the private sector create prosperity for the whole country.