Rishi Sunak was right to quickly put in place the furlough scheme we currently have. To not have done so would have been to risk many well functioning companies collapsing as a result of the restrictions the government had put in place. Doing so helped avoid an unemployment crisis that would have swamped the Universal Credit systems, and most importantly, risked the livelihoods and security of millions of families across the UK.
However, as lockdown restrictions are lifted, we cannot allow the furlough scheme and other means of corporate welfare to become the enemy of the ‘new normal’ that we all seem to be always talking about.
The scheme was very successful at freezing the economy, as was its intention. But as the thawing begins we should not expect the economy to be the same as it was before lockdown, nor should we want it to be.
Even without some of the restrictions that will remain for the foreseeable future, such as social distancing, consumer habits will have drastically changed. A poll last month suggested 27% of people are less likely to travel by plane. 20% per cent are less likely to go to the cinema. 26% are less likely to dine out. And despite a notable minority in the last few days, 34% said they are less likely to attend large public events.
While these are only stated preferences in a survey, both the continued threat the virus poses as well as the effect of experiencing a new way of life for some months will undoubtedly change what people decide to spend their money on and how those goods and services will be delivered to them.
It’s economically imperative that economics follows people rather than attempting to tell them what their preferences really are. With scarce resources it’s best for us all in the long run for markets to adapt to changing market conditions. Where it’s not government restrictions harming revenue raising, then it shouldn’t be taxpayers that are propping up bets on ongoing concerns for companies, but private financiers.
Many existing and new firms will benefit and grow as they enjoy new business, while others will shrink and go bust. This is not necessarily a bad thing. It is a process we normally see as some 1,400 firms go under each year as creative destruction replaces old inefficient firms with new innovative ones. Production shifts away from flying people around the world and towards e-commerce, telecommunications and other lockdown growth industries, making it both cheaper and more easily accessible for consumers.
The best way of achieving a recovery from this crisis, as well as dealing with the tab we’ve run up is of course growth. Innovative firms are at the forefront of helping us try and achieve the quick bounce back we are aiming for. Unusual businesses such as Artfinder, an online marketplace for new artwork, have reported a 110 percent increase in new customers as physical galleries have experienced restrictions.
Keeping key talent locked into the furlough scheme for jobs that may not exist in October is not just a huge cost to the taxpayer but also a huge opportunity cost for the value they could be creating in these new roles.
This unseen cost of holding onto the corporate welfare schemes for too long should not be overlooked.
While livelihoods should be secure and the welfare safety net should ensure none slip through, we should nonetheless start helping our economy adapt rather than continue enforced stagnation. Certainly by building on schemes such as The Skills Toolkit, along with greater business cooperation to assess the skills demanded will be a good preliminary in easing the transition. Transitioning towards an Australian “jobkeeper” allowance would, along with the current plans for part time furlough, help ease many furloughed staff back to work while also possibly giving an early indication if the job still exists and avoid a large unemployment shock when the scheme ends in October.
Of course, helping these innovative firms source talent is only part of the picture. Measures such as abolishing the factory tax will make it cheaper for firms to expand their physical capital, while also helping to overcome longtime lagging productivity growth which has held back income growth for years. Such measures will also help ensure that these businesses will be profitable and able to employ many of those who will unfortunately be made redundant in the coming months.
Clearly the challenge is assessing when furlough and other corporate welfare should be removed. It wouldn’t be sensible to remove support when lockdown measures are preventing some businesses from operating, especially when they can quickly revive once restrictions are lifted. But we must also be prepared, especially if some restrictions will still be enforced for the foreseeable future, to accept some failures rather than bear both the fiscal and economic cost of keeping our economy in stagnant stasis, while only kicking the problem down the road.
It will be by helping talent move from idleness, waiting for jobs that may have already died, to new innovative ones that create value that we will help ensure growth and secure livelihoods in reconstruction.