The British government is about to sleepwalk into an unemployment crisis | Coronavirus outbreak

The British government is about to sleepwalk into an unemployment crisis | Coronavirus outbreak

Crunch time for the economy has arrived. Lockdown restrictions are being relaxed across the UK, with England easing the quickest. From 4 July, hotels in Cornwall will be open and so will London pubs.

If things go according to plan, the cash that some households have been accumulating for the past three months will be unleashed in a wave of spending that will rescue bars, shops and restaurants from looming bankruptcy. The furlough scheme, introduced by chancellor Rishi Sunak at the start of the crisis will no longer be necessary. The UK will have a tough 2020 but disaster will be averted.

Yet nothing about the government’s handling of the pandemic so far inspires confidence that things will go according to plan. There were inadequate stocks of protective equipment. There was not enough spare capacity in the NHS. Decanting elderly patients from hospitals turned care homes into death traps. The lockdown was delayed, with baleful consequences for both health and the economy. Where is the promised world-beating tracking and testing scheme?

So it’s a reasonable bet that something will go wrong now as well. One risk is that there will be a second outbreak at some point over the coming months, because that is what has happened in Germany, where the crisis management has been much better than in Britain.

All things considered, this is a risk worth taking because it isn’t feasible to keep the country in a near-frozen state indefinitely. The economy is on course for its biggest one-year contraction in 300 years, with the poor and the young the worst affected groups financially. The deaths of those who may contract Covid-19 have to be balanced against the deaths of cancer patients deprived of treatment, the rising number of suicides and cases of child abuse, domestic violence and mental illness caused by ordering people to stay at home. As the number of Covid-19 cases comes down, it is right that these other considerations are given extra weight.

The other big risk – so far much less debated – is of a massive rise in unemployment if the government botches the next phase of the economy’s recovery. Here, the assumption is that Sunak – one of the few members of the cabinet to have emerged from the crisis with his reputation enhanced – is fully on top of things and will make all the right calls.

The chancellor’s record is not perfect, though. Even after expanding the coverage of his income support to include the self-employed, there are still more than a million people uncovered. Sunak had to provide a 100% state guarantee for small businesses after it emerged that financial help was not arriving from the banks quickly enough. The temporary increases in universal credit were welcome but only reverse a fraction of the cuts in welfare announced by a former chancellor, George Osborne, five years ago.

None of this poses a serious threat to Sunak’s reputation as a safe pair of hands, but it will be a different story if unemployment rockets this autumn as a result of the government’s furlough scheme being removed too abruptly from the most vulnerable sectors of the economy. Wage subsidies will start to be phased out in August and will be gone completely by the end of October.

The chancellor is at heart an economic liberal. He had no choice but to adopt an interventionist approach when the decision was made to lock down the economy, but that doesn’t mean he finds the current situation comfortable. He thinks the best solution to the difficulties faced by hospitality businesses or retailers is to give consumers the freedom to spend rather than any additional government support.

This approach is fraught with massive risks. The hospitality, retailing and leisure sectors employ millions of workers, and business was not exactly booming before the crisis. Many of them have had no takings for the past three months, and some restrictions will remain in place when the lockdown is lifted. Workers who have been on the furlough scheme will have seen their spending power reduced because they are on only 80% of their wages. They will be wary of spending too freely in case they are laid off over the coming months.

It’s a mistake to imagine that 2020 is going to be a re-run of the UK’s last recession in 2008-9, when the economy shrank by more than 6% but employment fell by less than 3 percentage points. As the labour market expert Prof Paul Gregg has pointed out, Britain could well be on course for a repeat of the early 1990s, when a much smaller fall in activity of 3% coincided with a 4.5 percentage point fall in employment.

The contraction in the economy this year will be much more severe than in either the early 1990s or the late noughties. The International Monetary Fund is at the optimistic end of the spectrum but is still predicting a 10% decline. Job losses are likely to be concentrated in sectors that are labour intensive, so the chances are that employment will fall by 10 percentage points as well, and perhaps by more. If that’s the case, the Bank of England’s forecast that unemployment will rise from 4% to 9% will prove far too low. The jobless rate will hit 14%-15%, the dole queues will lengthen to more than 4 million.

Gregg’s conclusion is stark. “The central point here is that the government has ploughed huge amounts of money into preserving firms and especially jobs. A large part of this will be wasted if the job retention scheme ends abruptly after lockdown ends. Furthermore, the fallout will be massive and the recession risks being more severe and sustained if there is a collapse of demand in the economy from widespread job loss and, even more important, widespread fear of job loss kicks in.”

That all sounds frighteningly prescient. Having sleep-walked into a health crisis, the government is about to sleepwalk into an unemployment crisis. Britain’s employment rate stood at a record level going into the pandemic, primarily because there were more women, ethnic minorities, older people, lone parents and immigrants in work. These are the low-paid, low-productivity jobs that are most at threat from the coming storm.

Historians may come to view the great financial crisis of 2008-9 and the great lockdown crisis of 2020-21 as a single event. There was no fundamental change to the failed model that led to the banks nearly going bust in 2008, merely a set of sticking plaster solutions, including the creation of millions of insecure jobs.

In the long term, an economic rethink and reboot is needed. In the short run, the response has to be to protect as many jobs as possible. There are plenty of options: targeting the furlough at vulnerable sectors; allowing all companies to furlough part-time staff for longer; cutting employers’ national insurance contributions. Otherwise, the current euphoria will quickly fade in the grimmest of winters.

• Larry Elliott is the Guardian’s economics editor

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