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6 May 2020

The Conservatives’ threat to cut the furlough scheme shows the logic of austerity endures

Rather than forcing workers to pay the price of the crisis, the government should borrow and tax the wealthy. 

By Paul Mason

The post-Covid-19 war on the working class has begun early. Rishi Sunak wants to wind down the Job Retention Scheme, which has paid 80 per cent of the wages up to £2,500 a month of 6.3 million people, in July. “People are addicted to the scheme,” a senior government source briefed the Times: with a current price tag of £8bn a month the policy has been deemed not “sustainable”.

Meanwhile, the leaked back-to-work guidelines, predictably, contain no specifics about compelling employers to provide protective equipment where necessary or enforcing safe distancing rules. And that’s understandable because across those parts of industry that have been working these past six weeks, safety management has ranged from lax to negligible.

The UK’s coronavirus death toll is now reportedly the highest in Europe, and the government might now be on a path to throwing millions on to Universal Credit, destroying skills and disrupting lives. Get back to work, safe or unsafe, is the message to Britain’s workers. As unemployment rises it will be – as in the 1980s – “get on yer bike and look for work”.

If so, it is time for Labour to take off the marigolds and put on boxing gloves. The trade unions fought a hard bargain behind the scenes to achieve the 80 per cent wage top-up scheme. It covers one in four people on PAYE and is far more generous than the offer stitched-up for the self-employed.  

That reflects both the power of organisation and the power of big business. There was a mutual interest between corporations and the major trade unions in retaining trained workforces, and a wider social objective too, in avoiding a sudden stop in mortgage and rent payments. 

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Though it got lost amid a welter of other, previously unthinkable commitments, the Job Retention Scheme was a model of tripartite social bargaining. The government wanted, and reportedly still wants, a 60 per cent figure; the unions and the Confederation of British Industry convinced the government that 80 per cent might make the difference between an economic slump and a depression.

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And that is still the range of options. Because while most people are, rightly, focused on the daily drama of deaths, equipment shortages and quasi-apologies from ministers, the real crisis is only beginning.

Many companies have been silently bailed out with grants and loans. But neither a grant nor a loan can substitute for revenue. Capitalism is a dynamic process, where today’s income is important not just for paying the rent but for projecting future sales, growth, expansion: it is on these projections that the share price is based, not the snapshot of monthly sales figures.

If ours were a relaxed and resilient capitalism, things would be easier. But large parts of the corporate sector have been restructured, over the past four decades, so that they operate continuously on credit and at the edge of insolvency.

Your local pub is probably owned by a chain. That chain was probably sold to a private equity company. Look for its beneficial owner and you’ll probably find an address in the Cayman Islands. And from the company to the tenant landlord to the bar staff, everyone was living on an overdraft before the crisis hit, and is probably just a few months away from the end of their credit line.

And that puts pressure on the banks. Last week the major US and European banks set aside $50bn for bad loans. But that’s not the whole story. Jane Fuller, co-director of Centre for the Study of Financial Innovation, writes“Anecdotally, the message that bankers are getting from prudential regulators is ‘don’t go over the top’ in anticipating loan losses. The concern is that if bank capital is sequestered to soak up future losses, businesses that need loans to survive the next weeks and months will die of thirst.”

Under accountancy rules introduced after the 2008 financial crisis, there is an assumption that if an investment is more than 30 days late in paying interest, the risk of a default rises significantly; and that if it’s not paid after 90 days then a default has taken place. However, this assumption is “rebuttable” – that is, subject to wrangling. Now we are “deep into rebut territory”, writes Fuller.

Behind the scenes, banks and their regulators are working overtime to prevent a domino effect of bad debts and busted financial instruments taking down large corporations and the banks themselves. But time matters. When 30 days becomes 90 days, no amount of “extending and pretending” can stop a financial collapse.

That’s what is rational about calls from the Tory right to end the lockdown. The Spectator-types who have been blustering against the science behind the lockdown are, in a way, following the same logic as climate change deniers. If Covid-19 turns out to be a multi-year, recurrent and mutating virus, capitalism as we know it is over.

The problem is that no one in the government wants to admit what the price is for stopping a tsunami of job losses, business failures and bank bailouts: it is the end of austerity as a mindset. Formally speaking, austerity ended on 8 March when Sunak offered the first significant real-terms boost to government spending since 2010. Just over a week later, when he committed a notional £330bn to saving the economy, you might have assumed austerity had been banished for good. 

But the logic of austerity haunts political debate. “How are we going to pay for this?” is a sensible question but the obvious answer is: not by flatlining our economy and destroying the NHS and social care all over again. And not by forcing millions of workers to take a wage cut in July, or letting their bosses throw them on the dole, or letting banks drown in bad debts.

We need a comprehensive and long-term rescue plan for our economy. That means extending the furlough scheme indefinitely, turning the business loans into outright grants, and, as the current losses crater the government’s tax revenue, running a vast budget deficit. 

When they’re asked “how do we pay for it?” I’m hearing a lot of nervousness from Labour frontbenchers, and understandably so. The required remedy would breach even John McDonnell’s fiscal rules, let alone the more cautious ones in the heads of the average soft-left Labour MP.

Here’s how we pay for it: we borrow the money and end up carrying a national debt well above £2trn (compared to £1.8trn now). Interest rates on that debt are low at present but could rise in future, if the private sector suddenly doesn’t want to lend to governments. If so, the Bank of England, which is already manipulating the interest rate by buying up government debt, could go further.

The bank could hold some government debt in perpetuity and, if needed, could simply buy new debt issued by the government directly. The term for this is “monetisation” and it is quietly already happening: the bank is letting the Treasury run an overdraft of undisclosed size, via the “Ways and Means” account. 

Beyond monetary financing there is taxation: the rich, businesses and the self-employed will all have to pay more. But the real prize here is the estimated $32trn in offshore wealth held in tax havens. The UK government could force every major corporation operating in this country onshore with a law that simply assumes their average profits based on their declared domestic turnover.

As for inflation, the other traditional way of eroding debt, unfortunately there is little chance of it. The real danger – given the structural problems that were undermining growth and productivity before the virus hit – is deflation, which simply increases the real size of the debts. 

At the end of this we are going to have a form of capitalism in which workers, small businesses, banks and corporations are effectively subsidised or sustained by the state. The brave thing to do would be to recognise this, make the argument for it and embrace new forms of ownership in which the state holds a stake not just in a few arms companies or ailing banks, but in many businesses, large and small.

It’s right that Labour can’t have its own plan for ending the lockdown – it should critique and influence the government’s plan, and hold it to account. But Labour must have its own plan for the future of Britain, and unless Boris Johnson and Sunak experience some overnight conversion to social justice, it will be radically different from the government’s. 

The next general election will not be decided by the pandemic death toll: it will be decided on the issue of who has a vision of a new economy.