RISHI Sunak has been lauded generally by the media. Many ascribe to him an economic and fiscal sureness of hand which is hard to fathom. Sure, he was thrown in at the deep end; Covid was not of his making. However, his response has been one of almost unconstrained spending. The media may celebrate him today, but how will history view the Treasury’s Covid-19 response?
By any measure the UK has made every effort to alleviate lockdown-induced pain. The BBC may publish wholly inaccurate data suggesting that the UK response has been parsimonious, with the bizarre claim the UK has just spent 1.5 per cent of GDP on Covid-19 packages (the real figure is well over 20 per cent) but in the real world Britain’s response has been amongst the most significant in the world in magnitude and relative scale. The National Audit Office puts the support so far at a staggering £372billion, or over one fifth of UK GDP.
Around £100billion of Covid-19 expenditure is in business loans, which theoretically will be paid back. However, a staggering £97.4billion has gone on additional health and social care, £55billion to individuals (largely furlough) and £65billion on ‘other public services and emergency response’.
These are big numbers in any analysis and it has been a major failing of the mainstream media debate that the microscope has fallen on the cry of ‘not enough’ (it never is) rather than the unprecedented scale of spending with a meaningful analysis as to whether it has been well spent and successful or not. What is true is that in a European context this is proportionately far greater than any other country, with the possible exception of Germany.
It is clear that while public spending has soared the private sector has borne the brunt, as the decline in private activity in 2020 almost perfectly mirrors the growth of public spending (see chart below). The message from Government in effect has been ‘We can lock your business down but don’t worry, the big benevolent state will see you all right.’
This approach has not, however, borne fruit. On any measure Britain has had a dreadful pandemic from an economic perspective. Prior to Covid-19 Britain was the poster child of European growth and employment, being consistently a top decile performer.
Not now. In 2020 Britain’s GDP performance was the second worst in the developed world, outlined by the chart below.
While there are many variables at play, much of Britain’s poor performance can be directly ascribed to policy response. Britain has adopted one of the most prolonged and draconian lockdowns in the west despite relative vaccine success. This has transferred economic activity from the private to the public sphere with disastrous consequences for both productivity and potential long-term sustainable growth.
Worse, while it is too soon to be definitive it seems that the big state public spending response has changed attitudes.
Consider this. Eighteen months on, some 3million plus remain furloughed, receiving 80 per cent of their wages to keep their employment seat warm. Add those on furlough to the 4.8 per cent of the population registered as formally unemployed, and some 4.5million people – 15 per cent of the workforce – are economically inactive.
Such levels of economic inactivity would normally be consistent with wage deflation. Not this time. Wage growth is ballooning, growing at 4 per cent per annum, the highest level for a decade. It’s even more of a boom in the public sector with wage growth at a staggering 5.6 per cent.
What is more extraordinary is the anecdotal evidence from the hospitality industry of very rapid wage growth for restaurant and hotel staff, with real labour shortages emerging. This at a time when over 40 per cent of former hospitality workers are furloughed. Something is badly amiss.
One can only draw the conclusion that furlough has changed attitudes to work for many and made some just a little reluctant to seek alternative employment when 80 per cent of their pay has been met for so long. I don’t blame them logically, why would you?
The chart below shows the proportion of each industry’s workers currently furloughed. It certainly is not consistent with a tight labour market which such strong wage growth implies.
Thankfully furlough is gradually being wound down with its end finally scheduled for the end of September. You can be sure, however, that there will be concerted pressure to extend it in some form, or offer some kind of universal minimum salary.
Sunak must resist. Furlough has already well outlived its usefulness and is almost certainly fuelling wage inflation and staff shortages. It is in danger of changing attitudes to work indefinitely. Wages are recovering strongly, arguably too strongly if inflation is not to take hold. Successful economies are based on market-based salaries which in turn are based on many factors including supply and demand, skill levels and availability. They should not be based on regulation, disincentive and bail-out.
We need to get back to a dynamic market-led economy that is based on private enterprise and wealth creation, not centralised handout, extreme monetary policy and unbridled public spending.
My message to the Chancellor is that if he is to be remembered favourably it is essential the emergency spending is constrained, and much more widely than just furlough. Life – economic, social and cultural – must brought back to the pre-lockdown ‘normal’ as quickly and smoothly as possible. Ensuring there is no re-branded Furlough Mark II would be a good start.