ALEX BRUMMER: Chancellor Rishi Sunak will have to make the most of limited fiscal capacity if a jobs catastrophe is to be averted
- There are 9m employees on furlough
- The formal data we have so far on the Covid-19 shows a peak to trough fall of a whopping 25 per cent
The crowded images from the Dorset coast, Southend and my home town of Brighton bring an uncomfortable thought to mind. My fear is that we are witnessing people dancing on the deck of an economic Titanic.
In the face of frightening forecasts for output, jobs and the public finances the nation has been lulled into a false sense of security as a result of Covid-19 transfers of resources from the public purse to private sphere.
In spite of a tick tock of job losses at Rolls-Royce, BA, Easyjet, Royal Mail, Centrica and almost certainly Intu, there are 9m employees on furlough. No doubt some are desperately worried, but the scenes on the beaches make it look as though many don’t recognise that they could be next. Only the left-out 1m self-employed (without the right tax records) have been confronted with the reality of the frugal job seekers allowance or universal credit.
Economic Titanic: The crowded images from the Dorset coast, Southend and Brighton bring an uncomfortable thought to mind
The Institute for Fiscal Studies noted a doleful legacy of the financial crisis of 2008- 09 earlier this week. As the UK went into lockdown, pay was still stagnating for median income households. The less well off in society were doing even worse, with five years of privation.
The banking meltdown resulted in a 4.1 per cent loss of output in 2008-9 or put another way, a 6.5 per cent drop from economic peak in 2007 to the trough a year later.
The formal data we have so far on the Covid-19 shows a peak to trough fall of a whopping 25 per cent. The IMF has forecast a decline of 10.2 per cent over the full year. Even if there is a bounce in 2021 the lost output will not quickly be recovered and the impact on jobs will be horrendous, with 1980s style unemployment beckoning.
It is against this disturbing backdrop, together with the prospect of £300billion plus borrowing this year and £100billion or more next, that Rishi Sunak will have to weigh up his economic options in the days ahead. In the short term, he is under pressure to cut VAT on the grounds that even the modest reduction from 17.5 per cent to 15 per cent after the financial crisis added back one per cent to spending.
He may not be inclined to do so on the grounds that a build-up of savings, along with reductions in credit card debt in the pandemic, means that consumers have the spending headroom they need.
More pertinent is the risk of high unemployment. As furlough is faded out between August and October Sunak will need to find new ways of incentivising employment. A simple approach would be a cut in employers’ contribution to national insurance, making it cheaper to keep people on the payroll. Sunak might even have to reach back to the 1997 Gordon Brown playbook of a ‘New Deal’ for young people if he wants to keep university and school leavers in training.
The UK has offered massive fiscal and monetary support as part of the effort to rekindle output and jobs. But it still compares unfavourably with what has been done in Germany and Japan. Germany went into Covid-19 with the luxury of a modest debt burden and the Japanese with the comfort that there is never any shortage of domestic demand for its government IOUs.
Sunak will have to make the most of limited fiscal capacity if a jobs catastrophe is to be averted.
Rental strike
Landlords rarely receive any sympathy. Intu, which has been serially mismanaged, with the accumulation of £4billion of debts, doesn’t deserve any.
However, some retailers have behaved disgracefully in the Covid-19 crisis with Primark, Boots, JD Sports among those which unilaterally suspended rents.
In effect, the retailers were passing the Covid-19 risks up the chain to real-estate owners. These are not the grasping landlords of urban myth. They include companies such as British Land, property funds and insurers including Legal & General. Pension savers will end up paying for the unthinking behaviour of shopping mall occupants.
Grocery champ
Pandemic costs have soared to £830m at Tesco but it is having a good crisis.
It reports a near double digit same store sales gain. It is price matching German challenger Aldi on a range of goods and has revved up its online sales with a 33.5 per cent market share in grocery against Ocado’s 15.7 per cent. Departing boss Dave Lewis might have to admit he is a better grocer than financier with Tesco Bank operating losses hitting up to £200m.
Anyone fancy buying a bank?