A disruptive new Covid-19 variant was not in the government’s economic script. After the vaccine roll-out and the removal of lockdown restrictions, the narrative was that we were accelerating towards the sunlit uplands of recovery. In his Budget less than two months ago, Rishi Sunak promised “stronger growth, with the UK recovering faster than our major competitors”.
Even before Omicron, this risked proving hubristic. UK GDP grew by just 0.1 per cent in October as supply chains were disrupted and living standards were squeezed (wage growth has ended). But the new variant means Britain now faces something far worse than economic stagnation.
Just as Omicron risks overwhelming an already strained NHS, so it risks overwhelming a fragile economy. Though few formal restrictions have been imposed, the new variant has delivered a hammer blow to the hospitality industry as individuals cancel restaurant and pub bookings en masse and a “lockdown by stealth” unfolds. The sector estimates that December revenue will fall by 40 per cent, with damage up to twice that level in London. Though the government has not imposed a lockdown (and Boris Johnson lacks the political authority to do so), businesses face punitive costs all the same.
Where, one might ask, is Rishi Sunak? The literal answer is California, where the Chancellor is on an official four-day trip. But Silicon Valley, the Chancellor’s chosen economic mecca, is unlikely to provide many answers on how to deal with a pandemic.
Sunak, who once decreed that “in normal times public spending should not exceed 37 per cent of GDP”, has grown weary of borrowing to support the economy. But support is now what is needed. Rather than individuals and businesses bearing the cost of Omicron, the state (which can afford to borrow at ultra-low rates) should do so.
In the absence of new support, the existing living standards squeeze will be turbocharged. Owing to the end of the furlough scheme and the withdrawal of the Universal Credit increase offered at the very start of the pandemic, individuals are more vulnerable than at any time since March 2020. As the Resolution Foundation has noted, “A single earner on £15,000 who loses their job will see their income fall to 30 per cent of what they are used to, compared to 40 per cent if they’d lost their job in an earlier wave or over 80 per cent if they’d be furloughed.”
The UK is an unfortunate country in which to lose your job or to be sick: unemployment benefit is worth just £74.70 a week (one of the lowest levels in the developed world), while statutory sick pay is worth £96.35 a week (also one of the lowest levels in the developed world).
Any sensible chancellor would increase these benefits. As well as providing individuals with the financial support they need to self-isolate, they will help protect living standards as inflation rises and wages fall. This will benefit the wider economy: as New York Times columnist Paul Krugman likes to observe, “my spending is your income and your spending spending is my income”.
The Chancellor could further introduce targeted grants and a targeted furlough scheme for firms, as the Resolution Foundation has argued (through thresholds “such as the premises being closed or VAT returns showing at least a 50 per cent fall in revenue”).
But how, some will ask, can the state afford to provide yet more support when the national debt stands at 95 per cent (£2.3trn)? Simple: though government borrowing has rarely been higher, it has also rarely been cheaper. Owing to the Bank of England, which has already taken the emergency step of creating (or “printing”) new money in order to directly finance government spending, and an average debt maturity of 14 years, Britain is in a far more comfortable position than many of its competitors.
The truth isn’t that the Treasury can’t afford to support the economy but that it can’t afford not to. And though the Omicron wave will prove brutal, it may also prove mercifully short.
Early in the pandemic, Sunak appropriated the mantra of Gordon Brown during the 2008 financial crisis, declaring that he was prepared to do “whatever it takes”. Unless he is prepared to do so again, we will all soon pay the price.
Update: Sunak is now planning to return from California on an earlier flight than planned.