Rishi Sunak faces one of the toughest decisions of his four months as Britain’s Chancellor of the Exchequer, with the livelihoods of millions dependent on his next move.
After taking the unprecedented decision to pay 80% of the wages of more than 8 million workers as the coronavirus swept through the U.K. in March, he has promised to set out next week how he will start to scale back the program.
It will be the biggest test of how hard the former Goldman Sachs Group Inc. banker will find it to turn off the spending spigot after committing unprecedented sums to prop up the U.K. economy, burnishing his own political reputation and earning the tabloid sobriquet “Dishy Rishi” along the way.
Now he has to balance the strain his policies are putting on the public finances — the furlough program alone could cost as much as 84 billion pounds ($102 billion) — with the risk that if he ends them too soon, he could trigger a wave of mass unemployment unseen since the 1930s.
“Given the huge effort and cost that went into putting the furlough system in place, it’s got to be unwound sensitively, or we risk a significant downside,” said Adam Marshall, director general of the British Chambers of Commerce. “The big risk is that hibernation turns into mass redundancies.”
If Sunak gets it wrong, and craters the economy, Boris Johnson’s entire government, already under fire for its response to the pandemic, risks punishment at the ballot box by millions of unemployed voters. Even if the chancellor succeeds, he will still have to find a way to pay for his largess through tax rises or increased borrowing.
Both the Bank of England and the Office for Budget Responsibility expect the unemployment to jump to about 10% from 3.9% now. That implies roughly 3.4 million people will soon be out of work, a figure not seen since the Great Depression.
Sunak, 40, has himself admitted he can’t save every job and has warned the country faces a severe recession on a scale “the likes of which we haven’t seen.”
So far, the Chancellor’s focus has been on saving jobs by splashing unprecedented levels of cash. By guaranteeing workers up to 2,500 pounds of income each month, he not only sought to protect the link between people and their jobs, but also to protect their pattern of consumption in the hope that their spending, and thus the wider economy, bounces back quickly after a brief disruption.
But the virus has lingered, and the cost of the government’s extraordinary support is rising fast. On Friday, British mortgage borrowers were told they will be allowed to skip payments for three more months. In all, the U.K.’s crisis measures will cost 123 billion pounds this fiscal year, the OBR says.
While Sunak’s job is eased by the Bank of England’s bond-buying plan and historically low interest rates, the damage to the public finances is mounting. Figures published on Friday showed the budget deficit swelling to a record, with the U.K. borrowing the same last month as it did in the whole of the previous fiscal year. The Institute for Public Policy Research predicts the debt-to-GDP ratio could reach 120% if the lockdown — which started on March 23 — lasts three months.
Even if the virus has passed its peak, the lockdown remains largely in place. On May 12, Sunak extended the jobs program by an extra four months to the end of October, promising that furloughed workers will still receive the same level of support. The catch? From August, companies will have to shoulder more of the cost.
Ministers are exploring making firms pay national insurance and staff pension costs that the government has taken on in addition to the wages, according to a person with knowledge of the matter. Other proposals include getting employers to pay 20% of wages with government shouldering 60%, or even asking businesses to meet half the furlough payments. Another possibility is to reduce the government’s contribution through August, September and October.
“The critical issue is that the burden doesn’t shift onto manufacturers too quickly or too deeply,” said Stephen Phipson, Chief Executive Officer of MakeUK, which lobbies on behalf of industry. “If you are producing equipment or goods for parts of the economy that are still closed or to sell in shops that haven’t reopened then that burden seems small, but will be a huge problem for businesses already struggling.”
The BCC’s Marshall said a “significant number” of companies are likely to go under whatever the chancellor does. And he added that sectors such as aviation, hospitality, tourism and leisure may need support beyond October.
The main opposition Labour Party, which was careful not to criticize Sunak overtly in the early stage of the crisis, is now pushing him to allow furloughed workers to return to the office part-time, something Sunak has pledged to allow in two months’ time.
“Businesses should not have to wait until the start of August,” said Bridget Phillipson, the number two in Labour’s finance team.
The Scottish National Party, Parliament’s third largest, is pressing Sunak to consider keeping the furlough program running for longer in different regions, according to its finance spokeswoman, Alison Thewliss. The party argues that Scotland, Wales and Northern Ireland may emerge from lockdown later than England.
At The Resolution Foundation, former Treasury economist Daniel Tomlinson urged Sunak to find a way to incentivize firms to bring back workers before October. That chimes with the verdict of Nicky Morgan, a former cabinet colleague of Sunak and ex-chairwoman of the Treasury Select Committee.
“The challenge for a Conservative chancellor in unwinding something like the furloughscheme is how to move it from being an employment support scheme to being an employment incentive scheme,” she said. “It’s not about underwriting salaries forever so people are forever reliant on the state.”