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Sunak has to spend now, and he will have to spend later

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Sunak has to spend now, and he will have to spend later Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. On Wednesday, straight after prime minister’s questions, when Rishi Sunak stands up to address the House of Commons, it will feel like a budget. And expectations are probably higher than ahead of most budgets, particularly after Boris Johnson’s ‘no big deal’ speech last week, dressed up as his version of Franklin D Roosevelt’s New Deal of the 1930s. The chancellor has been the undoubted star of the Covid-19 crisis and he will want to ensure that his crown does not slip this week. In some important respects this will not be a budget, however, but merely an economic

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Sunak has to spend now, and he will have to spend later

Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

On Wednesday, straight after prime minister’s questions, when Rishi Sunak stands up to address the House of Commons, it will feel like a budget. And expectations are probably higher than ahead of most budgets, particularly after Boris Johnson’s ‘no big deal’ speech last week, dressed up as his version of Franklin D Roosevelt’s New Deal of the 1930s.

The chancellor has been the undoubted star of the Covid-19 crisis and he will want to ensure that his crown does not slip this week. In some important respects this will not be a budget, however, but merely an economic statement. There will be no accompanying economic forecast or assessment from the Office for Budget Responsibility (OBR), and thus no formal assessment of the impact of this week’s announcements on the economy and the public finances.

The tension in the Treasury leading up to this week’s statement is between those who think the chancellor should act immediately and those that think he should keep most of his powder dry until the next formal budget in the autumn, when there will also be a spending review.

Sunak knows, however, that expectations are high and that politically, neither he nor the government can afford a damp squib. So, despite the unusual nature of this week’s statement it will be meaty.

There are reasons for holding some of the Covid-19 response back. Yesterday saw the reopening of much of the hospitality sector in England, so-called Super Saturday, and other parts of the UK will either follow or, in the case of Northern Ireland, got there slightly faster.

Last week also saw changes in the furlough scheme. From July 1, last Wednesday, employers have been allowed to bring back previously furloughed workers on a part-time basis. Firms will be required to pay for any hours worked, with the government still covering the proportion of usual hours that employees are not worked.

Further changes will take effect from August 1, when businesses will be required to may the National Insurance and pension contributions of furloughed workers. In October, at the end of which the scheme is due to come to closer, firms will pick up 20% of the pay of furloughed workers, the government 60%. The tapering in the scheme is intended to provide firms with an incentive to gradually bring back furloughed workers.

The great unknown, to the Treasury and everybody else, is how much unemployment this will leave us with. It should have better information than is publicly available on how many workers who benefited from the furlough scheme are still furloughed now. It is less than the cumulative 9.3m figure recorded by Her Majesty’s Revenue & Customs (HMRC), probably quite a lot less, but it is hard to be sure.

XpertHR, the employment consultancy, surveyed nearly 200 employers and found that one in 10 furloughed workers are set to lose their jobs by the end of August. Two-thirds will have returned to work by then. The Recruitment and Employment Confederation (REC) recorded nearly a million job postings in the last week of June, many of them in the hospitality sector ahead of reopening. Capital Economics has just revised down its forecast of the likely peak in the unemployment rate from 8.5% to 7%. That would be regarded by the Treasury as a great outcome, amid fears of much higher unemployment.

The economy is also in a state of considerable flux, not quite like trying to catch a falling knife but clearly changing by the day. Andy Haldane, the Bank of England’s chief economist, provoked a sceptical reaction a few days ago when he said he was become more confident of a V-shaped recovery in the economy, which was bouncing back more rapidly than feared. As a V-shaper myself, who has also countered scepticism, I naturally agreed with him.

Scepticism about a V-shaped recovery is unsurprising, particularly in the context of large-scale job losses, including more than 10,000 in the space of little more than 24 hours last week.

The explanation is straightforward enough. According to the Bank’s decision-maker panel of firms, sales in the second quarter, which has just ended, were 38% below normal, and in the current quarter will be 26% below normal, in the fourth quarter, 16% down, and in the first quarter of next year 10% below normal. That will not translate directly into GDP, which in the second quarter is likely to have been about 20% below normal, but it gives you the idea. After a spectacular fall in the second quarter, there should be some record rises in subsequent quarters. That is the “V”.

An economy that remains below normal even in the early part of next year, with some sectors like airlines and hospitality a long way below normal, cannot sustain as many jobs as a normal economy. Much of this year’s lost sales and output is lost for ever, hence the high levels of corporate distress.

What will happen? Annelise Dodds, the Labour shadow chancellor, has called for a “Back to Work budget, focused on jobs, jobs, jobs”. She is pushing, I think, at an open door.

There are some big ideas around. The Resolution Foundation think tank will this week call for a £30bn voucher scheme, as used in countries like Taiwan and China, to get people to spend in the hardest-hit sectors. It has also called for a £17bn jobs’ package, including a £5bn job protection scheme to evolve out of the job retention or furlough scheme. That is small in comparison with the estimated £60bn cost of the furlough scheme.

Reform, another think tank, has called for a £3.2bn package aimed at helping those for whom there is no job after furlough, including direct support and enhanced advice on assistance with skills and retraining for career changes out of those sectors which will not return to normal.

The focus will be on jobs. While there are scary numbers around on the coronavirus drop in employment (600,000) and nearly 3m universal credit claimants, the furlough scheme has been successful so far in preventing a surge in unemployment, notwithstanding those job loss announcements.

When the furlough scheme was first unveiled on March 20 this year, it was originally intended to cover three months of employment; from March 1 to the end of May. Now it will last until the autumn, as the Treasury has revised its expectations of the return to normality. They may have to be revised again but we cannot know that for sure now. That is why the chancellor has to come forward with measures to protect jobs this week, for the people already falling out of furlough and into unemployment. It is also why he needs to keep something in reserve for later.

Sunak has to spend now, and he will have to spend later
David Smith
David Smith is economics editor of The Sunday Times. His website is http://economicsuk.com . His latest book is Something Will Turn Up.

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