25 September 2020

Winter is coming – has the Chancellor done enough?

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One of yesterday’s more striking images was the sight of the Chancellor, Rishi Sunak, standing outside No.11, flanked by the CBI’s Carolyn Fairbairn and the TUC’s Frances O’Grady, ready to announce a new short-time working scheme similar to that in corporatist Germany.

I doubt this will do much to ease fears that increased state intervention will be the norm long after the pandemic has passed. Indeed, Sunak appears to be strengthening his position as the most popular of the current crop of government ministers. This is not always where you’d want a Chancellor to be.

One question we should ask more often, and especially when any Chancellor comes up yet with another cunning plan to spend other people’s money, is what exactly is the market failure that the latest intervention is supposed to correct? Put another way, what is the threat that the Government is attempting to ‘protect jobs’ from?

Supporters of the original furlough scheme at least had some good answers here. The Government itself had decided to shut down large parts of the economy, preventing markets from working properly. The fallout from the pandemic was a risk that private businesses and individuals could not reasonably have been expected to insure against.

What’s more, the furlough scheme protected companies and their staff from the additional uncertainty and transaction costs that would have resulted from the need to fire people and then rehire them again, when restrictions are lifted and demand recovers. And while the scheme was expensive, the alternative of mass unemployment could have been even worse.

However, almost everyone now recognises that the case for extending the furlough scheme in its previous form was very weak. The majority of the restrictions that crashed the economy in the spring have been lifted. The bulk of the job losses occurred in April and May, and new hiring has begun to pick up again. Most people have also already come off the furlough scheme itself.

We should not forget either that the original scheme was extraordinarily generous. Companies were able to keep staff on their books without contributing anything to wages or pensions, while employees could still receive up to 80% of their normal pay without having to do any work. No wonder it was so popular with both the CBI and the TUC!

Continuing in this vein would therefore have been unfair to those workers and other taxpayers who were not able to benefit, but will eventually have to pick up the bill.

Just as importantly, extending the furlough scheme would have been economically damaging. It was clearly important to avoid any unnecessary scarring that might have been caused by a surge in unemployment. However, that job has largely been done.

Indeed, the priorities have shifted over the last few months. The economy now needs to be free to adjust to the ‘new normal’, whatever that may be, and losing some jobs while creating others is a necessary part of that process. It is also even harder to justify paying people to do nothing in roles that may soon no longer exist.

That said, even I wouldn’t support a policy of abandoning every company and worker to whatever fate awaits. Significant parts of the economy are still struggling under the weight of social distancing rules, and some sectors will be hurt more than others by the additional measures announced by the Prime Minister this week. The arguments that applied to the whole economy in the spring might still apply to them.

Finding the middle ground

The Chancellor has attempted to find the middle ground with his new ‘job support scheme’. For people who work at least a third of their normal hours, the Government will pay up to a third of hours not worked, with the employer also contributing a third. There will be some additional conditions, particularly for larger firms.

This strikes a reasonable balance. On the one hand, it should help to tide many companies and workers over a brief period of additional restrictions and uncertainty. On the other, it will still incentivise firms to let people go and workers to find new jobs, if there is little prospect of them returning to full-time employment in their current role.

Indeed, the UK’s new ‘job support scheme’ is much less generous than Germany’s ‘Kurzarbeit’, where the Government covers a higher proportion of lost pay, and employers are not required to contribute to this top-up.

The UK scheme is also only due to last six months and the cost to the taxpayer is likely to be relatively small (perhaps only a few billion pounds, compared to the £34 billion already claimed on the CJRS by the end of July).

There are still plenty of concerns – including the additional bureaucracy and the greater potential for fraud and mistakes. The most vulnerable businesses could have been better shielded by a more targeted approach, while the money might have been better used to support the incomes of those who will still lose their current jobs and help them back into new ones.

Overall, though, I think Sunak has got it about right. Crucially, the latest economic data have continued to be stronger than most had anticipated, including the September CBI Distributive Trades Survey which was released without much fanfare yesterday. The recovery is therefore unlikely to be derailed by the additional restrictions, which will disrupt family and social lives but not have a huge impact on overall activity.

Even without the new support offered by the Chancellor, I had expected the headline unemployment rate to peak below 7% – a remarkable performance given the collapse in GDP in the spring. That forecast still looks good to me.

To be fair, it is positive that the Chancellor is consulting widely, including with leading business organisation and trade unions. He is also said to have relatively good working relationships with his civil servants and special advisors. This is surely welcome.

Despite all this, many observers – such as the Resolution Foundation and IFS – have suggested that the Chancellor has still not intervened enough. But as someone who has a lot more confidence in the power of free markets, I find that rather reassuring too.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.