Economic rebirth requires unemployment to rise

The Chancellor knows that the transition to a new post-covid economy will be painful in the short term

Not so much out with the old, in with the new, as first bring back the old. On the face of it, that was the mindset instructing Rishi Sunak’s “economic update” this week, with measures intended to defibrillate the housing market, the high street and the hospitality sectors.

This may, however, be something of a misreading of Mr Sunak’s underlying message. Dig down, and you find reluctant recognition of an underlying truth – that large parts of the old, pre-covid economy have very probably gone for good. Whatever the Chancellor does, they won’t be coming back. He must know that.

Now obviously, that’s not what he said in his speech. The Tories have spent most of the past three decades trying to bury their reputation as “the nasty party”, much of it derived from the steep rise in unemployment that followed the early years of the Thatcher revolution. Mr Sunak is not about to revive the uncaring image, impervious to the social consequences of rapid economic change, the party acquired at that time.

So what he actually said was: “I want every person in this House and in the country to know that I will never accept unemployment as an unavoidable outcome.” The regrettable reality is that a big surge in unemployment is indeed almost certainly unavoidable, short of continuing to subsidise jobs that have no long-term future.

This Mr Sunak has rejected – as he must, the Chancellor is refusing to extend furlough beyond October. Never mind the increasingly unaffordable costs of the scheme, support for jobs that to all intents and purposes no longer exist only starves the economy of the ability to create new ones. The Chancellor could have stood King Canute-like in front of the deep structural change now sweeping the economy, but it would not ultimately have served the country well.

The centrepiece of Sunak’s “Plan for Jobs” – the £9 billion Jobs Retention Bonus – was welcome as a kind of corporate tax cut, but it will make little difference to employment. Companies are very unlikely to take back staff they no longer require just for the sake of a £1,000 per head bonus. As if to prove the point, John Lewis yesterday announced that it won’t be reopening eight of its stores, with the loss of 1,300 jobs. Such announcements are now par for the course.

We should be careful not to exaggerate. Covid will not bring about the final death of the high street, the end of mass international travel or the long-term demise of commuting and office working. All these things will revive to some degree. But they won’t employ people in the same numbers or in the same places as they used to.

In thinking about the business consequences of Covid, Howard Davies, chairman of Royal Bank of Scotland, makes a distinction between pre-existing trends that have been accelerated by the pandemic, and things firms didn’t previously think they could do, but now know they can.

The most obvious example of the first is the switch from physical to online shopping, which has been supercharged by the pandemic. Prior to Covid, online retailing was growing at the rate of 10 per cent a year; since Covid, it has leapt 50 per cent. That’s nearly five years of growth packed into just three months. An example of the second type of change is large-scale home working, which always seemed possible, but tended to be dismissed as impractical. For compliance reasons alone, off-site employment wasn’t an option for much of the financial services industry, but many firms have now bought and installed the technology needed to make it work.

Virtually every business leader I talk to says they have found new, more efficient ways of operating. They don’t need as many people and they don’t need as much office space. This is good for productivity, a perennial failing in the British economy, but it is very bad for near-term employment prospects, and indeed for many commercial property owners. For now, big office developments such as London’s Canary Wharf look like massive white elephants.

Economies normally change incrementally, taking their time to move from the old to the new. But what we are seeing today is about five years of economic evolution crammed into just three months.

The Thatcherite upheaval primarily affected manufacturing sectors and was a deliberate act of policy in an economy that had become seriously uncompetitive. This one primarily impacts the service industries, and is an act of God. But the wider economic effects are not so dissimilar. The old is being wiped out before the new can properly establish itself. As in the Eighties, that makes for an acutely painful transition. The Thatcher reforms ultimately proved the salvation of the UK economy, but there were big mistakes along the way, with many communities left high and dry.

The Chancellor will soon be making his own transition – from Santa Sunak to Scrooge. Maximise the opportunities for economic rebirth while minimising the collateral damage of destructively high levels of unemployment – it’s quite a challenge.