Unemployment is rising. The national debt has topped £2tn for the first time. The economy contracted by 25% in just two months. So why then is Rishi Sunak the cabinet’s golden boy?
Well, for a start, everything’s relative. The chancellor has clearly had a tough first six months in the job, but has given the impression of competence and consistency when both have been in short supply. You don’t need an algorithm to work out which ministers would have failed their exams or to know that Sunak is not one of them.
The chancellor has the perfect riposte to anybody unhappy about the current state of the economy: not my fault. That’s a cast iron defence, because it wasn’t the chancellor who decided that the country should be locked down in late March and that sacrificing the economy was the only way to prevent the NHS being overwhelmed by Covid-19.
The third thing going for Sunak is that the economy’s recovery from the lockdown has been going as well as he could have dared hope. After months of being cooped up at home with little to spend their wages on, consumers have returned to the shops. Retail sales are now higher than they were before the crisis.
The strength of high street and online spending runs counter to surveys showing consumer confidence at a low ebb, but the polls also suggest that members of the public are more relaxed about their own personal finances than they are about the wider economy. Certainly, there has been no shortage of people eager to take advantage of Sunak’s eat out to help out scheme, with 35m discounted meals in its first two weeks in operation. Restaurant meals are not included in retail sales, but it is likely that the higher high street footfall the scheme generated is boosting spending in the shops as well.
Most analysts had expected that the recovery would have petered out by now following a sugar rush as restrictions were lifted in May, June and July. The latest snapshot of the economy from Markit/Cips suggests that this is not the case, with a sharp increase in activity reported by both the manufacturing and services sectors in August. This was in contrast to a similar survey for the eurozone, which fell back.
No question, the chancellor would have settled for the current state of the economy during the most severe part of the lockdown. The recession was not quite as bad as feared and the recovery has been stronger. There was even a silver lining to the public finance figures showing that UK national debt exceeded national income for the first time since 1961: the deficit for July was lower than the financial markets had predicted, while the shortfall in June was revised down.
All of which, if anything, makes life trickier for the chancellor as he weighs up his options for his autumn budget. If the recent economic news had been unremittingly bad it would be a no-brainer for him to announce a package of tax cuts and spending increases to stimulate activity. The fact that there have been signs of life returning to normal complicates matters.
That’s because Sunak is uncomfortable about how much the state is borrowing, as he made clear last week in his response to the release of the latest figures for the public finances. “Today’s figures are a stark reminder that we must return our public finances to a sustainable footing over time, which will require taking difficult decisions,” he said.
This doesn’t mean Sunak is going to announce tax increases or launch a new era of austerity in a few months’ time. Such measures may eventually come, but not this year. What the stronger-than-expected performance of the economy could do, however, is sway the chancellor against further meaningful stimulus in the budget.
That would be a mistake because, while there are risks in over-stimulating the economy, they are substantially less than the risks of not doing enough to support activity and jobs. The UK might continue to recover smartly in the coming months so that by the end of the year national output is back where it was before the crisis. It is not, though, the likeliest outcome as Sunak knows full well.
Nothing much should be read into the surveys showing that the UK did better in August than mainland Europe. Britain went into lockdown later, lifted restrictions later and is probably going to slow down later as well.
The ingredients for a period of weaker activity are there in plain sight. The Treasury’s wage subsidy scheme – the principle reason why people have money in their pockets despite not working in the spring and early summer – is being wound down. Mortgage holidays are coming to an end, which will cut into discretionary spending. Renters in England and Wales facing eviction have been given a reprieve – but only for the next month.
Meanwhile, the small print of last week’s impressive-looking Markit/Cips survey showed that businesses intend to shed jobs at a more rapid rate in the months ahead as pent-up demand is satisfied and the backlog of orders left unfilled during the lockdown is cleared.
Then, of course, there’s the threat of restrictions being reimposed. While the government, rightly, has ruled out another national lockdown, localised action in Covid-19 hotspots will be a direct drag on activity in the areas targeted and may affect behaviour elsewhere.
So, yes, the economy is currently on course for a record-breaking third quarter in which it may have expanded by more than 15%. The question for Sunak is whether recovery will be sustained. Left to its own devices, the chances are that it won’t be.