Misjudging the Scale of the Crisis

In ordinary times, today's announcements by Rishi Sunak would be significant – but given the scale of the economic crisis Britain faces they fall far short of the intervention required.

Rishi Sunak announced a package of spending commitments in today’s mini-budget designed to reduce unemployment as the furlough scheme comes to an end and to support a green recovery. The government has pledged that it will ‘build back better,’ using the necessary increase in government spending that results from the pandemic to shift the structure of our unfair, unsustainable and unproductive economy. 

Sunak has committed to a £2 billion for a scheme to create 350,000 jobs for under 25s; £3.5 billion to tackle climate breakdown, including vouchers for households to improve the energy efficiency of their homes; £1.5 billion for the arts and culture industries decimated by the ongoing ban on large public gatherings; and a £1,000 bonus to firms who keep on furloughed workers until January. With a budget deficit already expected to reach peacetime highs this year, such announcements do appear significant. 

However, as many have already pointed out, the announcements are not as generous as they initially appear. Forecasts made by government bodies in March suggested that 3 million people could be made unemployed as a result of the pandemic. High rates of unemployment tend to impact young people more than older people: employers will stop hiring new workers before they start laying off existing ones.   

And we know from previous experience that entering the labour force during a recession leaves a permanent ‘scar’ on an individual’s employability. Young people who come of age during a downturn face permanently lower earnings than those who join the labour force during the peak of the economic cycle. For those young people who end up facing long-term unemployment, a phenomenon called ‘hysteresis’ can set in: the longer a person spends out of the labour market, the harder it is to find employment. 

It is far from clear that the government’s employment scheme for young people will do enough to offset these challenges. Firstly, the jobs being provided pay minimum wage: that’s £4.55 for those aged 16-18 and £5.45 for 18-20 year olds. Many young people may decide to remain in education rather than take up a six-month gig that pays minimum wage, which simply means more competition for jobs down the line – not to mention more young people entering the labour force with significant debts. 

Second, we do not know what the take up will be like among employers. In a depressed economic environment like the one we are in now – and are likely to remain in until at least the end of the year – employers may simply not have enough work to hire new employees, even with a government subsidy. The same problems apply to the tapering of the furlough scheme.

The promises on home insulation are equally uninspiring. £3 billion is not nearly enough cash to combat the climate emergency – it is barely enough to cover the costs of retrofitting existing homes. Environmental think tank E3G suggests that at least £18 billion is needed to retrofit all existing buildings in line with the government’s 2050 net zero target. Just contrast the UK’s £3 billion pledge with Germany’s £36 billion green recovery package.

And while the money for the creative and culture sectors will go some way to supporting businesses through these tough times, it will not be enough to support the workers in these sectors – a significant portion of whom are self-employed. 

The fact is, when the furlough scheme comes to an end, we could be facing an economic calamity on a scale not seen in living memory. Millions of people could suddenly be facing unemployment alongside continuing demands for rent, utilities and debt payments. In the UK, at least 8 million people were already struggling with problem debt before the crisis hit. Without further support, we could see an increase in insolvencies.

The combination of a likely increase in unemployment in the UK, lower export earnings for UK businesses and the general climate of uncertainty that surrounds the pandemic itself will significantly constrain business investment. In fact, many of the UK’s small and medium-sized enterprises are unlikely to survive the pandemic without significant government support. The banks running the government’s ‘bouncebank loan’ scheme say that 40-50% of borrowers will likely default when the scheme ends. 

As I have argued elsewhere, larger businesses will find it much easier to survive – and even thrive – in the context of the pandemic. They may use their large pools of previous earnings and close relationships with financial institutions to buy up the assets of smaller firms that go under, consolidating the market power of a few big businesses. Over the long term, higher levels of market concentration could mean lower levels of investment and employment, and a significant increase in inequality. 

If this budget had come a year ago, it would undoubtedly have been greeted as significant. But Sunak’s promises cannot be adequately assessed without reference to the wider economic context.

The global economy could be facing the most significant global downturn since the Great Depression – and, as the President of the Federal Reserve Bank of St Louis pointed out last week, there remains a risk that the recession could turn into a financial crisis. A lot amount hinges on whether a signification portion of businesses and consumers will be allowed to default at the same time. 

The trouble the government faces – as shown today with the furore over the re-introduction of hospital car parking charges for NHS staff – is that it is easy to promise giveaways, but hard to remove them.

If Sunak continues to promise the world, expectations of the government will only increase. But the last thing this government wants is to take significant portions of the economy into public ownership – as would be necessary if we’re faced with a wave of corporate defaults. 

Ultimately, Sunak’s success will be judged based not on how the economy is faring in six months, or even a year – but in two or three years from now. In 2019, twelve years on from the financial crisis, our economy had barely recovered.

Moving from recession to recovery in the context of the pandemic will prove even more challenging. Sunak needs to promise much, much more if his much-vaunted prime ministerial ambitions are to be realised.