The government must now adjust to the reality of the economic positionby Jonathan Portes / October 26, 2020 / Leave a comment
When the facts change, I change my mind. Two months ago I wrote for this publication that the government was broadly right to end the furlough scheme, which comes to an end—at least in principle—on 1st November. With what we know now, that looks to have been the wrong call. So where do we stand?
Originally, many of us hoped for a “V-shaped” recovery—that is, that lockdown would definitively suppress the virus, so after a very sharp economic contraction resulting from the pandemic and the restrictions that were necessary to contain it, things would return more or less to normal. On that basis, introducing furlough so that businesses didn’t have to sack workers during the pandemic was the right thing to do; but once it came to an end there would have been no obstacles, political or economic, to ending the scheme.
By August, this seemed less plausible: while the virus had indeed largely been suppressed, and most restrictions had been lifted, the economy was far from normal, with offices mostly empty. But that still didn’t mean the right response was necessarily to extend furlough.
As I argued then, to the extent that the aftermath of the pandemic leads to permanent—or at least prolonged—shifts in demand, then extending furlough means that we are paying for people to do jobs that will no longer exist. That doesn’t make sense on either an economic or a personal level.
So I argued that the right thing to do was to couple the phasing out of the furlough scheme with help for people to get new jobs. Sadly, even when that seemed like the right strategy, the measures Rishi Sunak announced in September—inadequate and temporary—didn’t measure up, as almost all labour market analysts said at the time.
And since then we have gone backwards. Not only has the virus returned, but the uncertainty is if anything greater than in either March or August. Will there be a permanent shift towards remote working, with the associated consequences for offices and city centres? Will trade, travel, tourism and immigration rebound, and if so over what time period? This will depend both on the course the virus takes, the speed and efficacy of vaccine development and roll-out, and the behavioural responses of business and individuals.
Economically—as well as socially and psychologically—that poses…