Intervention essential, but does not signal a socialist state

The coronavirus job retention scheme is the biggest step the Chancellor has taken, both in terms of its nature (subsidising the wages of millions of private sector workers) and cost (potentially many tens of billions of pounds). This raises three questions. Is this degree of state intervention justified? What more is needed? And how will all this support eventually be stopped?

The first is relatively easy to answer. The Government has made the exceptional decision to shut down large parts of the market economy to save thousands of lives. It is only right that this is matched by exceptional policy responses to protect businesses and jobs, and prevent a temporary economic shock from becoming a prolonged depression.

The wage subsidies are cleverly designed. The Institute for Fiscal Studies has argued that it might encourage businesses to concentrate work among a small number of employees and furlough the rest, rather than sharing it more evenly. But that may be exactly what we want.

Firms would struggle to pay full wages to employees who are only occupied part-time. It makes more sense to allow those who most need to stay at home to do so, while subsidising their earnings. The financial cost is also bearable, especially compared to the alternative of doing nothing. Assuming the average wage subsidy is £1,500 per person per month, and this lasts three months, the bill would be around £4.5billion for every million jobs protected (less whatever the Government saves on unemployment benefits and eventually gets back in taxes). The total upfront cost could be as high as £40billion, or two per cent of annual national income.

That is not actually a huge amount in the grander scheme of the public finances. The wage subsidies could have an upfront cost similar to the £58billion that Labour was proposing to borrow to compensate women affected by changes in the state pension age, regardless of individual need. I know which policy makes more sense. Along with other measures, and the knock-on effects of the inevitable economic slump, the overall budget deficit could balloon again to the peak of 10 per cent of GDP reached in 2010 following the global financial crisis. However, both government borrowing and debt have been much higher in wartime, which feels the right benchmark now.

The second question – what more is needed – is harder. The economic policy responses are barely keeping up with the health measures, and gaps remain. The self-employed will need further support. Some will get extra help from means-tested benefits, delayed tax bills, or mortgage breaks, but for many this will not be enough. The next step may be some form of unconditional cash payment, whether targeted at the self-employed, or distributed more widely. The third question is how this will all end. Given how popular it is to blame capitalism for the world’s ills, from wars to climate change, it is no surprise that some have pinned the current crisis on the failures of free markets. Many have used the need for unprecedented intervention as evidence that the state should play a much bigger part in normal times. This is disingenuous. We are seeing an example – albeit an extreme one – of the job that the state has always been expected to do. Even the fiercest critics of the nanny state would agree that public health cannot be left entirely to the markets. Most economists would also agree that fiscal policy needs to take a more active role in responding to economic shocks.

The new economic measures are designed to be temporary. At some point, hopefully soon, the emergency measures to protect health can be lifted. The economy should then rebound, wage subsidies would no longer be needed, loan schemes can be wound down, and so on.

The measures are not as big a change to the capitalist model as some socialists might like to think. It is still private businesses that are employing people, even if the state is picking up a large part (not all) of the wage bill. While the Government and the Bank of England have provided additional cheap finance and loan guarantees, it is still private businesses that are doing most of the lending, borrowing, and spending, not the state. This distinction needs to be drummed home. The emergency response has not opened the door to a socialist planned economy. Thankfully. Julian Jessop is an independent economist