Yesterday, the chancellor, Rishi Sunak, made his latest support scheme for coronavirus-hit employers much more extensive than had been planned.
The initial furlough scheme – where the government paid a large chunk of the wages of staff who had been temporarily laid off – ends in October. The new scheme that will take over was designed to be less generous.
That’s partly because Sunak had one eye on the UK’s stretched purse strings. But it’s also because he wanted to push employers into making decisions. In short, he didn’t want to be paying for “zombie” jobs – ones that would only exist for as long as the government was part-funding them.
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That might have been a sensible approach if the economy was genuinely recovering. Unfortunately, that’s not what happened.
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Sunak’s move should save jobs – for now
Now that we have multi-tier lockdowns across Britain, Sunak has realised that he needs to shift tack. To cut a long story short, he’s made the support scheme for employers a lot more generous, to the point where it is much closer to the original furlough scheme.
Employers can now get support for any employee who works for at least a fifth of their normal hours (ie, one day for a full-time staffer). The employer pays for the hours that the employee actually works, but they then only have to pay 5% of the wage bill for the hours not worked (it was 33%).
The employee still has to forgo a similar chunk of their wages, while the government will cover the rest. But it means that, in effect, if you can still pay for someone for one day a week, there’s a good incentive to keep them on (particularly as there’s a £1,000 bonus for any furloughed employee retained until the end of January).
The previous approach risked creating a swathe of redundancies. It’s one thing to do that in a rapidly recovering economy where there might be jobs to go to; it’s quite another in a locked-down environment where no one is hiring. So the approach is good news for the employment figures – certainly for the coming months. One think tank (New Economics Foundation) estimates that it could prevent 1.75 million job losses in the near future.
Of course, it also adds yet more money to the big debt pile. But that’s where there’s a bigger picture lesson here, one that I think would be very useful for investors to wrap their heads around for the coming years. What’s interesting is what this makes very clear about the politics of government spending.
In summer, we had a bit of a surge of false confidence (at least, that’s how it feels now). We perhaps thought that we could get back to normal. The government was giving us money off restaurant meals, the sun was shining (as much as you expect in a British summer), and there was light on the horizon. As a result, by late summer, talk had started to turn to how we’d deal with the debt. There was clearly a group in government, Sunak foremost among them, who felt that we needed to start reining in the spending and give the taxpayer a gentle reminder that at some point they’d have to pay for it all.
Now, I don’t think that hinting at higher taxes or spending cuts in the autumn Budget was at all sensible, at least at that stage. People had been given a massive kick in the teeth from the lockdown. You don’t remind them that another kick is just around the corner while you’re still helping them up from the last one.
Nevertheless, there was a sense that the period of largesse would be ending and it was time to adapt to the brave new world. It looked as though Sunak was preparing to shift roles from being good cop to being bad cop.
Needless to say, with Covid-19 far from gone and lockdowns becoming more aggressive across the UK, that’s no longer the case. He’s had to blow the budget again.
We’re all believers in government spending now
My point here is not that either spending or austerity are the right way to go – they both have their place at different times. What I’m saying is that political reality dictates what is possible on the economic front. Sunak might have wanted to keep an eye on the purse strings, mindful of tougher choices ahead (and the impact on his own public image), but when politics demands that you shut the economy down, and when politics demands that you simultaneously try to keep your newly-found voter base in the north of England on side, then fiscal discipline – even the faintest hint of it – will be thrown out. And the more this happens without any obvious consequences (and with interest rates squashed flat, consequences seem unlikely to show up any time soon), the more the political momentum builds to do “whatever it takes”.
This is, of course, happening everywhere, not just in the UK. I read an interesting article this morning on CBS pointing out that the city of Compton, in California, has just launched America’s “largest universal basic income program”. That makes it sound much bigger than it is. The plan is to “distribute regular cash payments to about 800 low-income residents for two years.” But the point is that these sorts of experiments and schemes are only likely to gain momentum, particularly if they look successful.
Rusty Guinn of Epsilon Theory (a US-based investment research group) argues that the one sure thing that coronavirus will leave us with is “MMT [Modern Monetary Theory] from either party and both at once, from capitalists and anti-capitalists alike”.
In short, deficits and the national debt won’t matter until and unless they do. And that point arguably only arrives once inflation has finally taken off and central banks and politicians realise it’s a much harder thing to control than they’d had convinced themselves.
As I said yesterday, we’ll have more on how to invest for that possibility in our 20th anniversary issue, out on 6 November. Subscribe now if you don’t already (you get your first six issues free).
