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Sunak’s bridge to normality proves to be a rickety one

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Sunak's bridge to normality proves to be a rickety one 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. Who would be a chancellor? As the second wave of the coronavirus intensifies, and national lockdowns are unveiled in France and Germany, albeit less strict ones than before, the direction of travel in the UK looks clear. Last night, as people will be aware, the prime minister announced a government U-turn and another national lockdown. For the Treasury, this can only mean that the bill for responding to the crisis, which was already breaking records, goes up further, as does the challenge of restoring the public finances to health in the medium to long term.

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Sunak's bridge to normality proves to be a rickety one

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.

Who would be a chancellor? As the second wave of the coronavirus intensifies, and national lockdowns are unveiled in France and Germany, albeit less strict ones than before, the direction of travel in the UK looks clear. Last night, as people will be aware, the prime minister announced a government U-turn and another national lockdown.

For the Treasury, this can only mean that the bill for responding to the crisis, which was already breaking records, goes up further, as does the challenge of restoring the public finances to health in the medium to long term.

Sometimes I think back to February, when Rishi Sunak was happily carrying out his duties as Treasury chief secretary, deputy to the then chancellor Sajid Javid. Sunak was a cabinet new boy, having only been elected as an MP in 2015, and having been a junior local government minister until late July 2019.

Javid, in contrast, was on his fifth cabinet role and, after less than seven months as chancellor, and fully committed to the government’s “levelling up” agenda – which is looking a bit lopsided at the moment – and looked to be at the Treasury for the long haul.

It did not happen. Javid resigned, Sunak got the call, giving rise to a conversation with Boris Johnson which might have gone something like this. “Rishi, the good news is that you are going to eb chancellor. The bad news is that the coronavirus pandemic is going to give us the biggest recession in a century and a budget deficit two and a half times the previous annual record.”

It did not happen. On February 13, the date of his appointment, the UK had had nine reported cases of coronavirus but the prime minister had not then woken up to the danger. Sunak’s first budget, nearly a month later on March 11, including a response to the emerging Covid-19 crisis but this was only a taste of what was yet to come.

As poisoned chalices go, this one competes with that of Alistair Darling’s appointment of chancellor at the end of June 2007, weeks before the financial crisis came to Britain with the run on Northern Rock. Sunak, however, had even less time to get his feet under the table when his crisis hit.

That he has handled it with aplomb is a credit to him. He is the most competent and popular member of what, admittedly, is a dysfunctional government. The unprecedented furlough scheme was announced on March 20, days before the national lockdown and only nine days after the budget.

This was a time of all hands to the economic pump. One the previous days, March 19, the Bank of England had announced a record low of 0.1% for interest rates and a further £200bn of quantitative easing. While other parts of the government’s response to the coronavirus were struggling, and in some respects continue to do so, the economic response was fast and formidable.

The furlough scheme has so far prevented an unemployment tsunami. The unemployment rate at the latest count, June-August, was 4.5%, from a pre-Covid low of 3.8%, though roughly 700,000 payroll jobs were lost between March and September.

But it was due to end yesterday - before last night's month-long extension - and the normally surefooted Sunak stumbled last month when he announced the first iteration of his winter economic plan in September.

Now, he is getting what chancellors should perhaps expect in difficult circumstances, criticism from many sides. Some of it, like a video doing the rounds on the internet, is an attempt to get a class war going because he is personally rich and can be put to one side.

He is also getting blamed, however, for cancelling the planned three-year spending review, instead of which there will be a one-year only review, covering 2021-22, to be unveiled on November 25. The Ministry of Defence is very unhappy with this, saying it has scuppered plans to conduct an integrated review into defence and security, and left the armed forces facing new uncertainty.

It has gone down like a lead balloon in Downing Street, which wanted the spending round to reinforce the government’s commitment to its levelling-up agenda. In what may also be a default position, there is increasing tension between 10 and 11 Downing Street.

This comes at a time when, even though the furlough scheme has been spared the immediate axe, we are moving into a period of significantly higher unemployment. Sunak’s revised job support scheme will, like furloughing, reduce the peak in unemployment when it comes in in December, but it has gone down badly, particularly in areas facing Tier 3 restrictions, with pretty well every TV vox pop saying that people employed by firms forced to close cannot be expected to survive on two-thirds of pay, possibly for months on end.

No chancellor can escape criticism, trying as this one is to balance supporting the economy with what he has described as his “sacred duty to future generations” to manage the public finances. Most economists would say that there is no trade-off between short-term support for the economy and the public finances in the long-term – helping people stay in employment will be good for the economy in the long run – just as they do not see a trade-off between lockdowns and sustained recovery.

They are right, but they are not the ones presiding over an official forecast of a £372bn budget deficit this year. And they are not the ones who will have to respond if the government is, like France and Germany, forced into a national lockdown over the winter.

If there has been a persistent error in Sunak’s approach it has been over-optimism about the course of the virus. When the furlough scheme was announced in March, it was originally intended to run until the end of May. When the virus and the associated restrictions were extended, so was the scheme. The chancellor saw his emergency measures as a bridge back to normality. Normality has, though, proved to be elusive.

In August, basking in the success of his Eat Out to Help Out scheme, which was intended to provide a bridge to normality for the hospitality sector, the chancellor let it be know that he was pondering tax-raising ideas, some of which could be set out in his November budget.

But the budget was cancelled when the second wave emerged, and higher taxes will have to wait. His first iteration of the winter economy plan and the job support scheme acknowledged the risks from a resurgence of the virus but said that there were reasons to be cautiously optimistic. That resurgence, however, and the restrictions it triggered, forced the chancellor to revise the job support scheme and make it more generous. No official costings have ben released for those changes. Further changes may be needed in a new lockdown. Some argue that the original furlough scheme should be fully reinstated, and not just for a month. The Treasury’s Covid response is far from over.

It is better to have an optimistic chancellor than one who despairs. There will be a time when the virus is genuinely in retreat and Sunak’s bridge to normality will be the right analogy. But not for a few months yet.

Sunak's bridge to normality proves to be a rickety one
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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