Comment

Rishi Sunak should follow Trump’s lead and ramp up benefits

As the wait for a vaccine goes on, a switch from furlough to more generous handouts could help the economy adjust

“Do the right thing” was Chancellor Rishi Sunak’s message to businesses across the country after urging them to hang on to furloughed staff for a few more months and claim his £1,000 job bonus.

But the key question here is: do the right thing for whom?

As the end of the furlough approaches on October 31 and a jobs bloodbath lurches into view, debate still rages between Covid-19’s economic victims and the fiscal hawks.

Sectors such as hospitality are pushing for extra support, while free market proponents - including several of Sunak’s predecessors in 11 Downing Street - want economic nature to take its course, whatever the cost.

As bodies such the Organisation for Economic Co-operation and Development are beginning to argue, the shift should be towards protecting people rather than jobs. Is it the “right thing” for viable businesses to be encouraged to keep on staff they should really let go?

Is it the “right thing” for workers themselves to see their roles preserved in aspic when they should be retraining and looking elsewhere? And is the potential zombification of thousands of companies that should really fail the “right thing” for an economy already under-invested in compared to its major rivals and a productivity laggard?

Ex-Chancellor Sajid Javid has been clear that the furlough scheme should end.

Philip Hammond, a successful businessman before politics, also stresses the negative effects of market interference in his own calls for a jobs shake-out.

Hammond raises ghosts such as British Leyland when he warns against “throwing good money after bad” with a return to 1970s-style bailouts, which cost the taxpayer and ended in failure.

He says: “The Treasury wisdom is that painfully learned through the 1970s and 1980s is that when industries need to restructure, you need to recognise that.

“The longer you delay, the more public money you pour into trying to pretend that failed businesses are viable and unemployed people are actually employed, the more difficult it is to actually recover. Many of the people shaken out of the labour market in the 1980s never worked again because they were trapped in non-viable industries for 15 years.”

The Bank of England, which is not in favour of a furlough extension, has lowered its unemployment rate forecast for the end of this year from 9pc to 7.5pc.

In Hammond’s view, sectors like aviation and hospitality will need to become structurally smaller in response to the pandemic and its after-effects - even if the comparison of the consequences of Covid-19 with the travails of 1970s Britain is a little extreme.

Leyland was, after all, blighted by a lack of innovation, fierce competition and militant unions, before the oil crisis and soaring inflation finished it off.

When ministers have enforced the shutdown of much of the economy and are compelling bars and restaurants to operate under continued restrictions, it is also too early to make definitive judgements on structural shifts.

I heard one example of a wedding DJ who hasn’t worked since mid-March, when around 250,000 couples a year get married in the UK.

To suggest those weddings will never come back due to factors like social distancing and that a £10bn-a-year industry has been blighted for good feels far too sweeping at this stage. The question really hinges on when a vaccine eventually emerges.

But if the hawks win out - and Sunak himself has been clear that he doesn’t want to give “false hope” to the 3m-plus still furloughed - then clearly the job retention scheme has to finish to aid the UK’s economic remodelling.

The problem is that employers are still reluctant to hire. Last week’s jobs figures showed vacancies at barely half their pre-Covid levels.

It’s here that the Chancellor should take a leaf out of the Donald Trump playbook and find a middle way to prevent the prospect of throwing 3m or more workers into penury.

The US did not use a furlough and instead paid a flat-rate $600 a week in emergency benefits to workers until the end of July.

Democrats and Republicans are still fighting in Congress over a permanent replacement after Trump announced a temporary stopgap. And Republicans in particular voiced concerns over an emergency measure that paid two-thirds of claimants more than their previous salary.

That said, the generosity did not deter 10m from going back to work between May and August, including some 3.6m typically lower paid bar and hotel workers who might have been better off sitting on benefits. The payouts, after all, were temporary

According to the Chicago Booth School of Business's panel of economic experts - including more than a few Nobel winners - “employment growth is currently constrained more by firms’ lack of interest in hiring than people’s willingness to work at prevailing wages”. 

If Sunak really wants to re-gear the post-Covid UK and allow economic evolution to take its course, then he should break the link between employers and their furloughed staff.

The most affected sectors of the economy, such as arts and entertainment and hospitality, still have huge proportions of staff furloughed.

Moving Trump-style to massively enhanced universal credit payments, with top-ups linked to retraining, frees up employed workers and gives them some measure of financial support through a harsh economic winter. 

Hence it follows that the Chancellor won’t need his £1,000 furlough bonus any more. The Office for Budget Responsibility has already pencilled in an extra £13bn in benefit payouts over the next five years, most of which is accounted for by the extra UC cash.

That could be topped up with the £9.4bn estimated cost of the job retention bonus, and more besides, for a year.

On the other hand, employers could be incentivised to take on staff through cuts to their national insurance contributions and other tax breaks. Many of those laid off might use the financial breathing space to start businesses of their own; and there’s nothing to stop our wedding DJ starting up again next year if the pandemic eases.

If a vaccine was close, some kind of sector-by-sector furlough would be more attractive, even with the attendant risks of Government micromanaging individual parts of the economy.

But if one is unavailable until mid-2021, as most experts suggest, Sunak needs a new strategy.

A resurgent virus, and the fresh economic pain it will bring, gives him the political cover to extend the furlough if he chooses. But doing “the right thing” for the future of the economy should perhaps push the Chancellor down a harder road. I don’t envy him the choice.