Rising unemployment and a second wave of Covid present Rishi Sunak with his toughest challenge yet

As winter draws in and a second wave of Covid-19 rises ever higher, Boris Johnson and his team have a series of unenviable decisions to make.

The UK’s failure to contain the pandemic will result not only on lost lives, but further significant financial hardship, meaning the next stage of the government’s economic response will be pivotal.

For months, the 31 October end of the furlough scheme – a vital pillar of financial support for millions of people – has loomed large. The chancellor’s last-minute decision to draw back from the precipice and replace furlough with the job support scheme has undoubtedly stopped many job losses.

However, mistakes and delays have caused uncertainty and already pushed thousands out of jobs that may have been viable in the long term.

It might seem unfair to question whether a chancellor who has spent £210bn on the coronavirus response has been bold enough, but Rishi Sunak has shown an increasing uneasiness with the measures he has taken, and a misplaced desire to get back to balanced budgets.

Government has a “sacred duty” to balance the books, he told the Conservative Party conference. It’s an article of faith which Conservative, Labour and coalition governments have taken as gospel for several decades, but it risks doing huge damage as the crisis deepens.

A rigid belief in the need for fiscal responsibility had already left the UK ill-prepared for a pandemic. Spending cuts meant underfunding of local authorities and public health services that should have been central to contact tracing.  

They also left the UK with a welfare safety net that does not provide enough for people to live on. Most of our European neighbours have designed unemployment benefits to soften the blow of losing a job and provide a percentage of a person’s income so their lives are not unduly interrupted.

In the UK, debate has focused instead on the idea that payments from the state encourage “dependency” and must be strictly limited to deter scroungers – the rhetoric deployed by some MPs about free school meals is the latest chapter in this.

With unemployment expected to rise sharply alongside soaring coronavirus case numbers, the inadequate safety net doesn’t just mean a financial disaster for the households directly impacted. It is a problem for the wider economy and all of society.

A plausible scenario in which 3 million people are out of work on benefits while others see their income reduced under the JSS would take billions of pounds of spending power out of an economy already suffering. 

Consumer spending stalled at around 90 per cent of its pre-pandemic level between July and September, even though most of the country was not under restrictions, according to the Institute for Fiscal Studies. 

This hides widely diverging experiences for different income groups. The fifth of the population on the highest incomes have increased their savings because they’ve mostly kept their jobs while spending less on things like holidays, clothes and restaurants.

Meanwhile, the poorest fifth of households – who are more likely to have lost their jobs, had their hours cut or be put on furlough – ran down their bank balances by £1,220 between March and September, meaning they have even less of a cushion to deal with a new lockdown.

All of this strengthens the case for a higher level of support, not lower.

It seems unlikely that the chancellor will concede for the third time that he needs to increase the help available, which would effectively take us back to the initial furlough scheme he vowed to scrap. And the prospect of raising out-of-work benefits is remote.

That means more damage will be done and the UK will be attempting to rebuild from a worse position than it otherwise might have been in. The next stage of the economic response will be far more involved than deciding what level of support for wages and businesses is required. It will also be next to impossible to deliver while the virus is still tearing through the country.

So what is needed?  

“Our first priority must be to start using all of the unworked hours lost to the pandemic productively,” says Alex Chapman, senior researcher at the New Economics Foundation. We are collectively working around 100 million hours less than we were before the pandemic.

“We could be supporting people to access education and training programmes that equip them for good jobs in the zero carbon industries of the future.

“Part-time studying and distance learning, which have been left behind during years of austerity, need scaling up rapidly to meet this challenge.”

Insulating millions of homes could form the central plank of a “transformative” green agenda that the NEF estimates could support 400,000 jobs.

Years of under-investment in infrastructure mean there are a lot of “shovel-ready” projects that could also be accelerated. 

There is also a need to reassess the jobs we need after the pandemic, says Henry Parkes, senior economist at the Institute for Public Policy Research. Areas like social care, for example, need a much larger workforce to be trained up.

What about the rising national debt that chancellor has expressed so much concern about?  

“We need to keep in mind the historical context which is that it has been much higher,” says Parkes. “In other countries it’s considerably higher. It's also currently the cheapest it's ever been to borrow money.  

It's a good time to borrow and we desperately needed to invest even before the coronavirus. If the investment is well spent it will pay for itself in additional GDP growth.

Even the International Monetary Fund, which for decades has been a global voice for fiscal responsibility and privatisation, told the chancellor this week that more spending was needed to rebuild the UK economy.

With Sunak due to make another announcement next month, we will know very soon whether he’s taken that advice.