It’s shaping up to be all too familiar. A worsening outlook in the pandemic, a government slow to react, and confidence fading fast among businesses and households.
In many ways Christmas couldn’t come soon enough for Boris Johnson’s government, amid a storm of bad news as the prime minister’s Teflon ability to survive political scandal appears to be deserting him at last. But rather than acting as a distraction, the festive period merely highlights the serious problems facing the British economy that could make matters worse.
The Omicron variant of Covid-19 has been hitting businesses hard, with the hospitality sector suffering from a wave of cancellations and lost trade during what ought to be the busiest time of the year. Meanwhile, inflation is at its highest for a decade, in an unfolding cost of living crisis that will get worse before it gets better.
Both require action. Yet so far the government has been behind the curve, with the cabinet caught in a depressingly familiar conflict between doing the right thing and doing the ideological thing. It ought to be clear by now that stepping up with state support to protect lives and livelihoods has prevented a far worse reckoning for the economy during the pandemic.
Early in the crisis, Rishi Sunak promised to do whatever it takes to steer Britain through, ultimately extending £400bn in support. It was hoped before the emergence of Omicron this would be enough: as the chancellor had grown fond of saying, dire forecasts last year for unemployment to peak at 12% have been confounded. What he fails to stress is how that estimate was based on him scrapping furlough in October 2020, a policy he ditched as the pandemic worsened last winter.
Much has changed since, not least thanks to vaccines, but there is a worrying sense of deja vu. It’s clear that confidence is again draining out of the economy as Omicron spreads, while faith in the government’s response evaporates. What’s worse, the economic support schemes available earlier in the crisis have largely been dismantled.
As infection rates soar, hospitality venues are either voluntarily closing their doors or are managing a plunge in bookings. According to figures from Opentable, seated diner numbers in the past week have slumped to about a fifth below the equivalent period in 2019. Pubs, theatres and nightclubs are similarly struggling. With speculation mounting over the need for tougher restrictions, the prognosis looks bleak.
Sunak has been keen to point to measures introduced before Omicron that could help, such as business rates relief for eligible retail, hospitality and leisure businesses in England, and VAT at a reduced rate of 12.5% for hospitality until March. However, there are signs that further action could be coming soon, after the chancellor flew back from California to meet virtually with business chiefs on Friday, who pressed him to intervene.
The International Monetary Fund told Sunak last week that contingency plans for a mini-furlough would be required if Omicron forces the government into closing parts of the economy, although vaccines and other mitigating measures would make the kind of severe lockdowns and extensive support deployed a year ago unnecessary.
It’s a message taken on by the Bank of England, which argued last week that inflationary pressures were more important to respond to than Omicron, as it raised interest rates for the first time in three years, arguing that successive waves of Covid had tended to come with a reduced impact on GDP and consumer spending. As the Omicron situation worsens and Threadneedle Street withdraws its accommodative stance, Treasury assistance will be increasingly important.
Ahead of the Christmas break the top priority should be to support businesses and households through a difficult winter, in response to both the Omicron economic chill and the unfolding cost of living crisis. Grants and loans for hospitality, travel and leisure companies in the worst-affected sectors of the economy are the best place to start, while a targeted reboot of furlough should be announced to operate in lockstep with any tighter restrictions.
Torsten Bell, the chief executive of the Resolution Foundation, believes such a version of furlough is vital, despite Treasury reluctance to focus it on specific sectors. While No 11 has long argued that a sectoral approach is too difficult, these claims are overdone, he says, as this was exactly the approach taken for state-backed grants.
To ensure value for money, and that the hardest-hit sectors are helped most, threshold tests could be applied; such as if a venue has closed its doors, or if VAT returns show at least a 50% fall in revenue. Austria has extended its furlough scheme until March 2022 with similar tests for access.
“Whatever the imminent cause of that economic pain, the right policy answer is to provide targeted economic support. Reviving a more limited version of the furlough scheme is the easiest way to do that and protect household living standards,” Bell said.
With a targeted approach the chancellor would meet both the test of responding to Omicron, while recognising that the landscape of the pandemic has fundamentally changed thanks to the vaccine programme.
The exit strategy should be, it is hoped, clearer than in earlier waves, making the case stronger still for temporary, targeted support. To dither for longer would put to waste the progress made from the billions of pounds already spent.
