Can Rishi Sunak’s winter plan save the UK economy?

For a man who keeps having to cancel Budgets, Chancellor Rishi Sunak nevertheless seems to be delivering an awful lot of the things this year.

He cancelled the November budget earlier this week. Then yesterday, he proceeded to deliver a Winter Economic Plan. Or a Budget, as you or I might call it.

So what was in this plan, and how much might it help?

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Rishi Sunak takes on the “good cop” role

We’ve seen the government announce new restrictions in response to Covid-19 numbers picking up again (we’re not convinced these numbers are entirely reliable – listen to this podcast with James Ferguson of MacroStrategy Partnership for more – but that’s where we are).

The new restrictions may not be a total lockdown, but they’re not far off it, at least to our increasingly cabin fever-addled minds.

If everyone is working from home again and the pubs are meant to shut at 10pm and you can’t have more than six people in your house or whatever it is, then economic activity is going to take a hit – it’s hard for it not to. “Back to normal” is being pushed right back again.

It’s as Helen Thomas of Blonde Money described it to me in another recent podcast: rather than “velocity of money”, we're limiting the “velocity of people”. Can our recovery – which was looking promisingly V-shaped – continue in the face of all this? It’s not going to be easy.

That means it’s up to Sunak to play “good cop” to Boris Johnson’s “bad cop”. Sunak’s the one who has to figure out how to pick up the pieces. Hence the Winter Economic Plan.

The main issue right now is jobs. The furlough scheme – whereby the government was footing a big chunk (at first it was 80%, then falling to 60%) of the wage bill for employees who had been temporarily laid off – ends at the end of next month.

In its place will come a six-month long “Job Support Scheme”.

What will that involve? The government will step in to help subsidise jobs where staff are working reduced hours, but only if employees are working at least a third of their usual hours. Employers will pay the wages for the actual hours worked. The government and the employer will then each chip in a third of the wage bill for the hours not worked (the final third is simply foregone).

In effect, what the chancellor is saying is that it’s decision time for employers. The government will support viable jobs that have been hit by temporary lack of demand, but, as Paul Johnson of the Institute for Fiscal Studies think tank put it, it won’t be paying out to keep “people in jobs that will not be there once we emerge from the crisis”.

On the one hand, that suggests that unemployment is set to rise. The new restrictions are going to push some of the hardest-hit businesses over the edge. We’d all got excited during the summer about the prospect that maybe it was all over – unfortunately, that’s not how things have panned out.

On the other hand, I’d imagine that most employers have seen the writing on the wall already and will by now already have made plans for redundancies if necessary.

There is some extra support for the hospitality business – the VAT cut from 20% to 5% has been extended until the end of March next year. Flexibility on VAT payments has been extended too, helping cashflow.

The various government loan schemes are being extended until the end of November, and both the Bounce Back and Coronavirus Business Interruption loans have had their terms extended from six years to ten. There will also be a new loan scheme from January.

There’s no magic wand – even with all the money printing going on

Obviously this means even more public spending, but in the context of what we’ve already spent on Covid-19, it’s not really breaking the bank (or breaking it any more than it’s already broken). As Ruth Gregory of Capital Economics notes, “the new measures could cost about £5bn (0.2% of 2019 GDP). This means that the total cost of the government’s Covid-19 support could be in the region of £200bn (8.9% of GDP).”

What does that mean for the public finances? Well, it looks like we’ll end up borrowing nearly 20% of GDP in 2020-2021. That means our overall debt-to-GDP ratio will rise above 100% that year.

That’s the sort of thing that you’d be worried about in normal circumstances, but these are not normal circumstances. Indeed, things haven’t been “normal” for a long time, let’s face it.

It’s small wonder that the Bank of England keeps talking about things like negative interest rates. I don’t think the Bank will “go negative” – I cannot see any benefit to it, and I’m not entirely convinced that anyone else can either.

I suspect there are two main reasons the Bank keeps the idea alive. The first is to remind us all that the central bank isn’t out of ideas. There are still things it can do. Negative interest rates is a convenient shorthand for that.

Secondly, it means when they announce that they’re going to do more quantitative easing (which seems likely, especially if we need to fund a deficit of that scale), then they can frame it as being the sensible alternative to turning rates negative. It won’t come as a big shock.

So that’s where we are. There’s no magic wand that can be waved – even with all the money printing in the world – and it’s interesting to see that the chancellor at least tried to push back a little against the lockdown crusade that appears to be gripping some in the cabinet.

“Life means more than simply existing”, he said amid his Winter Economic Plan announcement.

I mean, he could just be trying to deflect attempts to blame “eat out to help out” for rising Covid-19, but I have to say, I appreciate the sentiment.

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