The Covid-19 crisis has been good for Rishi Sunak’s reputation. While other cabinet members have floundered around, the chancellor has won plaudits for his handling of the economy during its pandemic-enforced lockdown.
That’s not entirely surprising because Sunak’s main job for the past few months has been to shower Britain with cash. Yes, he has faced pressure from those that have not been benefited from the state’s largesse – freelancers and some self-employed workers, for example – but the chancellor’s stock has risen.
Judging by the reaction to his mini budget on Wednesday, Sunak’s share price has peaked. But for the first time in his brief spell running the Treasury, the chancellor has come in for some flak. To be sure, there was a welcome for some of the measures, but there was also an undercurrent of unease that the package as a whole was insufficiently bold given the threat to jobs in the coming months.
Take the response from Carolyn Fairbairn, the director general of the employers’ organisation, the CBI. Fairbairn said just as the challenge in the spring had been to flatten the infection curve so the task now was to flatten the unemployment curve. Her welcome for the chancellor’s job creation measures came with a “but” attached.
“Many viable firms are facing maximum jeopardy right now”, she said. “The job retention bonus will help firms protect jobs. But with nearly 70% of firms running low on cash, and three in four reporting lack of demand, more immediate direct support for firms, from grants to further business rates relief, is still urgently needed.”
Sunak seems to have taken his inspiration from nudge theory, a branch of economics that has been all the rage in recent years. The idea is that small decisions by governments can result in big changes in consumer behaviour, or in this case that people nervous about going out for a pizza can be persuaded to do so with a big shove.
The most nudge-like of all the measures was Sunak’s “eat out to help out” scheme, which gives anybody eating out between Monday and Wednesday in August 50% off their bill up to a maximum of £10 per head.
Whether this proposal will be enough to lure people out to cafes and restaurants remains to be seen. Neil Wilson, an analyst at the financial trading platform Markets.com, described it as the “kind of back-of-fag-packet policy idea dreamt up on the hoof by Ollie Reeder in The Thick of It”. Anti-poverty campaigners said the £500m cost of the scheme would be better spent boosting welfare payments so that poor families could put food on the table.
A more substantial measure was the decision to cut VAT for businesses in the hospitality and tourism sectors from 20% to 5% until March. Again, the plan is to provide an incentive for households to go out and spend rather than save over the coming months. Worryingly for the government’s hopes of a V-shaped economic recovery, the expected rush to the pub after last week’s reopening in England failed to materialise.
Given that the chancellor has made the VAT cut time limited, there is a risk that spending will fall sharply when prices go back up next spring. This, though, is a gamble Sunak thinks is worth taking. The hope is that the economy will be through the worst by early 2021 and that the hospitality and tourism sectors will be able to cope by then.
It is the next few months, the period when the furlough scheme is being wound down, that is critical. The evidence from other countries is that many see an initial burst in activity as lockdown restrictions are eased but the economy then enters a second phase when the recovery slows down.
The UK is about to enter this period, and the justifiable fear of the government is that businesses will start to lay off staff in large numbers between now and the end of the furlough scheme in October. Sunak has resisted calls to extend the furlough scheme or make it sector specific, but instead is offering businesses a £1,000 job retention bonus for every worker kept on until January.
Here, the issue is one of scale. Since the lockdown began businesses have been receiving up to £2,500 a month in wage subsidy per employee furloughed. For many of them a £1,000 bonus will simply not cut it.
Fighting a pandemic does not come cheap. There were no official forecasts yesterday but the government is on course to borrow around £350bn this year. That figure may well rise. If, as seems entirely possible, unemployment rises sharply in the months ahead, there will be more stimulus in Sunak’s autumn budget.
The chancellor thinks it would be more expensive to have mass unemployment than to support the economy and he is right about that. It might take more than £30bn to do the trick, that’s all.
This post has originally been featured in Guardian.