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In the time that is has taken the earth to orbit the Sun our Prime Minister has stormed to election victory, secured Brexit, divorced, presided over a pandemic-induced recession and had a baby. In that time his popularity has fluctuated but it is safe to say that, with just 39% holding a positive opinion of the PM, the “Boris bounce” has deflated. Given that we are merely on the crest of an economic tsunami with the beginnings of a catastrophic collapse in employment, this could give his supporters cause for concern. So, too, could news today that lockdown – the sole justification of which was to prevent the NHS from being overwhelmed – could cost 200,000 lives.
No matter how many times his ministers reassure the British public that they will “put their arms” around us, the harsh truth is that we cannot be shielded from the true consequences of this crisis. GDP is down by a fifth since it was mandated that we become economically inactive. We’ve saddled ourselves with £300bn of public debt. Output per capita is now equivalent to pre-crisis levels of Puerto Rico or Malta. When the furlough scheme unwinds, 4 million people – most likely more – will be unemployed.
We’ve thrown ourselves off the cliff and our ascent, to misquote Alex Honnold, will be like walking up glass. But we’re sunbathing in the valley, disconnected from reality, cushioned by the furlough scheme or, if you’re in the loft insulation business, the Green Homes Grants. Fiddly initiatives designed to keep certain businesses above water won’t prevent them from drowning when financial reality bites – but they will add to the growing debt.
What is lacking in the government’s current messaging is a sense of timeframe. If the science is correct and we must live with Covid for the foreseeable, how do politicians expect the UK economy to look in six, twelve, or eighteen months? When will we transition from temporary to permanent measures? Is Panglossian to hope that this might manifest itself in a move away from furlough to more flexible employment practices? From further complications of our tax code (in the form of targeted VAT cuts) to a much more benign tax and regulatory environment for businesses?
None of this is to say that the furlough scheme was the wrong course of action. As Sam Dumitriu of the Entrepreneurs Network has flagged, this recession hits highly productive businesses just as much as less productive ones. In the absence of external support, thriving firms were just as likely to go bust as those that weren’t. Allowing these businesses to go bust, forfeiting the entrepreneurship, innovation and toil that went into building them, would have been a net loss for society.
But the flip side to this is that we are propping up zombie firms. Of the 600,000 companies created in Britain every year, under normal circumstances around 60% will fold within 36 months. Under Covid, their demise could be swifter.
As nine million workers have had – or are still having – their wages paid for by the government, we must ask ourselves whether all these jobs will realistically still be there come October. If not, we should make the case for allowing workers and resources to be put to other uses, towards things that people do want.
Consumer behaviour may inexorably change: in the coming years we may need fewer cafes, or cinemas, or airlines. In spite of the Prime Minister’s encouragement last week, there is widespread reluctance to return to the office. The government did a good job in convincing people of the danger posed by Covid-19 (more to the NHS than to our lives); coaxing us to back to work without the widespread availability of a vaccine was always going to be difficult.
Even in normal conditions, jobs disappear all the time. A recent study shows that in 2017-18, 951,915 jobs were lost as businesses closed, while a further 1,307,640 jobs disappeared as surviving firms reduced headcount.
As Professor Len Shackleton has pointed out: “No government can freeze employment by fiat, and extended attempts to do so are likely to inhibit the necessary creative destruction process and movement of workers from job to job.”
The Jobs Retention Bonus – a £1,000 bonus for each worker who remains on payroll – might delay redundancy, but it won’t prevent it.
Instead, as a recent IEA report highlights, we need to make it easier for companies to take on staff. Simplifying the minimum wage system and scrapping the commitment to the National Living Wage reaching two-thirds of median hourly earnings by 2024 would be a good start.
One way of rebuilding a prosperous economy that benefits everybody, especially those left behind, is to restore full employment, not to price workers out of a job or disincentivise them from seeking work. We should reassess Employers’ National Insurance and the regulatory obligations placed on employers to make it easier for them to hire.
For even the most steadfastly optimistic economist, hopes of a “V”-shaped recovery must have started to fade. The aim must now be to make it as straightforward as possible for existing businesses to revive and new ones to start up – and to encourage them to take on as many workers as they can usefully employ.