Even before the Covid-19 pandemic struck, the British economy was in poor health. GDP failed to grow in the final quarter of 2019, average real wages had only just returned to their 2008 level and productivity growth was the weakest of any major country.
Yet these woes pale in comparison with the perils now confronting the economy. In the first half of this year, GDP fell by 22.1 per cent: the worst UK recession since records began in 1955 and the worst of any G7 country. The British economy is now no larger than it was in mid-2003.
To date, however, most people in the UK have been insulated from the pain of this fall in output. Faced with the pandemic, the government responded with admirable swiftness by increasing Universal Credit payments and introducing the Job Retention Scheme. By undertaking to pay 80 per cent of furloughed workers’ wages (up to a maximum of £2,500 a month), the Chancellor, Rishi Sunak, prevented a spike in unemployment of the kind seen in the US (where joblessness peaked at 14.7 per cent). The furlough scheme, which has supported 9.6 million jobs since its introduction in April, continues to sustain an estimated four million roles.
On 31 October, this economic life raft will be withdrawn. One consequence could be rapidly rising unemployment. Companies have already announced tens of thousands of redundancies: 9,000 at Rolls-Royce, 7,000 at Marks & Spencer, 6,500 at Debenhams, 2,800 at Pret A Manger, 1,500 at WHSmith, and so on. The Office for Budget Responsibility has forecast that unemployment will peak at 11.9 per cent – more than three times its pre-crisis level and the highest rate since the miners’ strike in 1984.
In his summer statement on 8 July, Mr Sunak declared: “I will never accept unemployment as an unavoidable outcome.” He was right. The risk, however, is precisely that the Chancellor’s actions could trigger an avoidable jobs crisis.
Across Europe, countries including Germany, France and Italy have extended their versions of the furlough scheme until the end of this year or beyond. Not for the first time during the Covid-19 crisis, the UK is a troubling exception. Mr Sunak has announced measures such as a £1,000 Job Retention Bonus for each furloughed worker companies bring back. But a recent survey by Lloyds Bank found that only 18 per cent of businesses with furloughed workers expect to retain all their staff.
Why, then, is the government retreating? As an instinctive fiscal conservative the Chancellor is alarmed by the dramatic increase in the national debt to £2trn (or 100.5 per cent of GDP), as Stephen Bush writes on page 7. The furlough scheme alone has cost £35.4bn. But this has been money well spent: the UK can borrow at ultra-low or even negative rates (debt interest payments were £2bn lower in July 2020 than the previous year). In these circumstances it would be reckless to withdraw government support owing to arbitrary borrowing targets. A spike in joblessness would help thwart the recovery by reducing individuals’ spending power and damaging “animal spirits” or economic confidence. As research has long shown, unemployment permanently scars the young, with bleak consequences for our society.
For these reasons, Mr Sunak should learn from the errors of George Osborne, the so-called austerity chancellor, and maintain fiscal support until the economy has returned to health. Rather than simply ending the furlough scheme, he should replace it with a German-style programme to save jobs by subsidising part-time work.
In the longer term, the crisis is an opportunity for the UK to transform its flawed economic model: reducing its overdependence on the financial sector, investing more in infrastructure, and creating good, well-paid jobs in green industries, childcare and social care. Debt should be gradually reduced by increasing economic productivity and raising taxes on wealth and static assets such as land ownership.
For now, however, the priority is for the state to fulfil its protective duty and prevent mass unemployment.