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9 October 2020

Rishi Sunak’s middle way on Covid-19 is the worst of all worlds

Having failed to win the argument for reduced spending, the Chancellor has settled for spending money badly instead.

By Stephen Bush

Employees working for businesses that have been forced to close due to Covid-19 will have two-thirds of their wages paid for by the state under a new extension to the furlough scheme. The size of the financial support package available to businesses in areas under heavy lockdown has also been increased.

But the new furlough scheme, unveiled by Rishi Sunak, has a variety of perverse features. As well as the painful pay cut for most furloughed workers that a reduction in subsidy from 80 to 66 per cent represents, there is another element that will be felt directly by those employees, and indirectly by everyone else. If you are a business or a worker in an area where hospitality venues are forced to shut, you will receive financial support. But if you are a business or a worker in an area where inter-household mixing has been banned, with painful consequences for your ability to trade and operate, or where the 10pm curfew or the rule of six has limited your ability to trade, you will receive nothing.

This makes no sense at all economically: if the government intends to support “viable” jobs, then a job in a city or town centre pub is either “viable” or it isn’t. It can’t be the case that a bartending job in Liverpool (soon to be under the new “tier three” restrictions) is viable, but the same job in Yeovil (under the nationwide tier-one” restrictions) is unviable. It also creates a jagged edge in the devolution settlement, in that the best thing the Welsh First Minister Mark Drakeford and the Scottish First Minister Nicola Sturgeon can do for businesses is to shut them down.  

Added to that, the plans are based on a view of economic activity that might make sense if you are a government minister, who has to split the world into administrative areas, but make no sense beyond that. If you are a business or a tourist hotspot – such as Shropshire or Cornwall – your ability to trade doesn’t just rest on whether or not people in your local authority area are confined to their homes. If Merseyside or London or Birmingham is in lockdown, that has consequences for the ability of restaurants in St Ives or Cromer or Whitby to trade, too.

The reason for the incoherence is that the government is split. On the one hand, the Chancellor and like-minded ministers think that Covid-19 is here to stay, that the economy needs to begin the painful process of adjusting to that reality, and that Sunak needs to turn his focus to, at the least, halting the increase in government debt. On the other hand, Michael Gove and other like-minded ministers believe solving the health crisis must come before solving the economic crisis, whether for economic reasons or because they believe they cannot allow themselves to be outflanked on the health question by Sturgeon.

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Faced with those opposing sides, the government has reached a compromise. But the compromise is a bit like settling an argument about whether you should put some food in the freezer, or throw it away to save on energy bills, by putting it in the fridge: you still bear the costs, but you don’t get the benefits. Because you can’t choose whether you spend a lot of this money, you can spend it through providing unemployment benefit or via job protection, but you spend it one way or the other. 

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The question is which one of those methods allows you to stop spending quickly once either a vaccine or palliative treatment allows you to end social distancing – and it’s not clear that letting jobs be lost in an uneven fashion is the best way of doing that. The consequences of the muddled middle way between the cabinet’s coronavirus hawks and doves will be painful, both economically and socially.