RISHI SUNAK has been lauded generally by the media. Many ascribe him with an economic and fiscal sureness of hand which is hard to fathom. Sure he was thrown in at the deep end, covid was not his making. However, his response has been one of unbridled and 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 thrown the kitchen sink to try to alleviate lockdown-induced pain. The BBC may publish wholly inaccurate data suggestion that the UK response has been parsimonious with the bizarre claim the UK has just spent 1.5% of GDP on covid-19 spending packages (the real figure is well over 20%) 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 £372bn, or over one fifth of UK GDP.
Around £100bn of Covid-19 related expenditure is in business loans, which theoretically will be paid back. However, a staggering £97.4bn has gone on additional health and social care, £55bn to individuals (largely furlough) and £65bn to “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 in a European context this is far greater than any other country proportionately with the possible exception of Germany.
What is clear is 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 effectively has been ‘we can lock your business down but don’t worry the big benevolent state will see you alright.’
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, as 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, and while it is too soon to be definitive, it seems the big state public spending response has changed attitudes.
Consider this. Eighteen months on, some 3 million plus remain furloughed receiving 80% of their wages to keep their employment seat warm. Add those on furlough to the 4.8% of the population who are registered as formally unemployed and some 4.5 million people – or 15% of the workforce – is 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 annum, the highest level for a decade. It’s even more of a boom in the public sector with wage grow at a staggering 5.6%.
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% 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% 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 industries workers currently furloughed. It most 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, 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 now recovering strongly, arguably too strongly if inflation is not to take hold. Furlough is now almost certainly part of the problem constraining labour availability. Successful economies are based on market-based salaries which is 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. It’s time; No More Mr Nice Guy.
