Rishi Sunak’s rapid and decisive move to introduce generous furlough payments to a third of the UK’s workforce temporarily saved hundreds of thousands of jobs and spared misery. But was it worth it?
The cost of Rishi Sunak’s furlough scheme – which pays 80% of salaries for 8.4 million workers – has been around £14 billion month per month since March. That’s a bill of £84 billion up to the end of August. The scheme was aimed at preventing mass layoffs, as lockdown restrictions caused large parts of the economy to shut down. One million companies have been using the scheme, helping them to keep on staff until things get better, after which they can spring back to life. However, a growing number of local lockdown’s and social distancing rules are making any kind of comeback increasingly unlikely for many employers.
Social distancing itself means that thousands of restaurants, cafés, boutique shops, hairdressers, B&B’s and more will find that as furlough tapers off, their business models will be shattered. And the supply chains so intimately connected to them will be deeply affected. Towards the end of May 2020, Sunak said:
“We stood behind Britain’s businesses and workers as we came into this crisis and we stand behind them as we come through the other side."
“Now, as we begin to reopen our country and kickstart our economy, these schemes will adjust to ensure those who are able to work can do so, while remaining among the most generous in the world.”
Being amongst the most generous in the world is welcome news for millions who face likely unemployment when furlough ends – but it is little comfort to the many thousands of companies preparing to go bust. Those lucky enough to remain in work after furlough ends will have to foot the bill through eye-watering tax hikes.
The Director of the Institute for Fiscal Studies, Paul Johnson, said that Mr Sunak will have no choice but to increase big-ticket taxes, like income tax, national insurance, and VAT, in order to raise the “really serious amounts of money” needed to fill the black hole in state finances. A ‘black hole’ may be an understatement: so far, the Chancellor has spent around £190 billion – a vast canyon of borrowing. The sad reality is that as furlough ends and hundreds of thousands hit the dole, the state will then have no choice to pay benefits to an almost unimaginable number of people.
All in all, we may be looking at a level of tax rises that would make Michael Foot blush. Unconfirmed reports in the The Times this Monday suggested that the chancellor is considering a rise in corporation tax from 19 to 24 per cent at a cost to business of £12bn, while capital gains could be levied at the same rate as income tax. Even taxing business £12 billion would be little more than a drop in the ocean. The same Times article reports that Sunak is leaving nothing off the table – even the sacred pension triple-lock, which guarantees pensioners annual rises of whichever is the highest of wage growth, price inflation, or 2.5 per cent.
What is the alternative?
Given the paucity of intellectual and economic opposition to what is essentially an attempt to stick a very expensive plaster on a gaping economic wound, there may not be an alternative. One idea could be to slash taxes to boost investment – an idea that (pre-COVID admittedly) worked wonders for investment and job creation during Trump’s first three years. In January this year, the unemployment rate in the USA was 3.6%. It was more than fifty years ago, in December 1969, when the unemployment rate was lower at 3.5%. Trump’s employment figures are startlingly good – almost seven million more people were recorded as employed in January 2020 than when Mr. Trump was elected in November 2016.
Proponents of the Reagan-esque ‘trickle-down’ theory might say this is evidence that a low tax economy works. History shows us that time and again, it does – at least for a period. Thatcher turned around a desperately flagging economy in the 1980’s even at the expense of the nation’s manufacturing and extractives industries. Slashing taxes towards the end of 2020 and in early 2021 would also be in keeping with the new pro-investment, free market, low tax Brexit rhetoric that Boris Johnson elicited in the 2019 General Election: a brave new start to Brexit Britain’s new role in the world. There has never been – arguably – a better time to crack on with creating a low tax economy boosted by free ports that are a magnet to overseas businesses and investors.
A low-tax, deregulatory response to a vast black hole in the nation’s finances might stand a chance of driving growth. It would be bold – and it would take a Chancellor with cast iron crown jewels to pull it off. However, set against enormous opposition from the left and right of politics and a centrist big-spending Prime Minister, it seems unlikely. The furlough scheme and all of the other short-term COVID-19 economic strategies trumpeted and rolled out by our young but impressively confident and charming Chancellor may, it seems, have simply put off what is perhaps completely inevitable under the current political climate: an unimaginably painful economic collapse that will take a generation to recover from. This is perhaps the most important time in recent history to shift our nation’s economic model to the right – but the easiest time to avoid doing so.
Written on behalf of Optimus Law