The Observer view on the reopening of the economy

It was trailed as a desperately needed cash injection on the scale of Roosevelt’s New Deal. Yet when the prime minister set out his plans for infrastructure investment last week, they amounted to a tiny fraction – less than £100 per head – of the more than £4,000 per person spent by the US government after the Great Depression. The chancellor is expected to set out more detail this week on what he will do to save jobs and boost demand. But all the signs are that it will be unequal to the task of protecting people’s livelihoods in the wake of the biggest economic downturn for 300 years.

The unprecedented scale of the economic shutdown necessitated by the pandemic paved the way for a huge package of financial support for individuals and businesses. There have undoubtedly been important gaps, but in the main, chancellor Rishi Sunak responded swiftly and pragmatically. Just over three months later, and it seems Sunak is determined to reset course, away from the large-scale intervention that the economy continues to require, and towards a more traditionally laissez-faire approach. Hence the move towards relaxing the lockdown to allow large swaths of the economy to reopen – despite the warnings from some prominent scientists that this is happening too soon – and the planned phase out of much government financial support in the coming weeks.

This brings two serious risks. The first is that relaxing the lockdown before there is a functioning test, track and trace scheme risks a second spike in infections that entails further lockdowns across parts of the UK, or even the country as a whole. This would undoubtedly be more detrimental to the economy than delaying the relaxation a few weeks until the track-and-trace scheme is properly operational and infection rates have further fallen.

The second is that there is an insufficient resurgence in demand over the summer to keep retail, leisure and hospitality businesses afloat. Consumer confidence is likely to remain fragile as people worry that the lockdown is being relaxed prematurely, and about the security of their jobs. This is borne out by the experience of US states and countries such as Sweden that did not formally lock down: they still suffered a big economic hit as people chose to stay home, but also suffered higher death rates as there was enough mixing to spread the virus; the worst of all worlds. And no amount of entreating from the chancellor to go out and spend is likely to overcome people’s fear of losing their jobs.

The government must adopt a more activist approach to protecting the economy in the medium term. The top priority must be protecting jobs. The total number of hours worked across the economy has already fallen by almost 10%], and the weight of job losses and furloughing has been borne by lower-paid and younger workers. Some economic commentators are predicting a 10 percentage point drop in employment once the furlough scheme is phased out between August and October. Being laid off during a downturn affects people’s earning prospects for their rest of their lives, particularly for the young.

The government must therefore urgently set out an extension of the furlough scheme beyond October, targeted at the retail, leisure and hospitality sector, by providing wage subsidies while demand remains depressed. It should introduce a job guarantee scheme for the 18-25s. And it must spend in order to create jobs to replace those that are being lost in retail and leisure: the Resolution Foundation has suggested that it could spend £5bn creating an additional 180,000 jobs to take the ratio of care workers to the older population back to 2014 levels. Fulfilling the Conservative manifesto commitment of spending £9.2bn on insulating homes, hospitals and schools to make them more energy efficient – reportedly on the back burner, because it is considered “boring” by Johnson’s adviser, Dominic Cummings – could not only reduce the almost 20% of the UK’s carbon emissions that are produced by draughty buildings, but create tens of thousands of new jobs.

The economy also needs a significant demand stimulus. The Resolution Foundation has argued that a £30bn stimulus could be delivered through a £500 voucher for every adult and £250 for every child, to be spent within a fixed period in the hard-hit sectors, such as face-to-face retail and hospitality. This is both more effective and fairer than either a cash handout, which would simply be saved by more affluent households, or a VAT cut, which disproportionately benefits better-off households. The government must also provide targeted support for Britain’s arts sector because many theatres and cultural venues stand on the brink of bankruptcy, unable to break even under social distancing requirements: this is a sector that is not only vital for the economy but is a priceless part of our cultural heritage.

This recession has disproportionately hit lower income households, who have had to take on more debt, even as the most affluent households have been saving more. The emergency boost to benefits and tax credits that was announced back in March is temporary and does not make up for the thousands of pounds a year many low-income families with children have lost as a result of a decade of cuts. The government must commit to restoring tax credits and benefits to the pre-austerity levels of 2010, which would also stimulate demand in the coming months.

This is a moment of maximum danger for the economy. It is exactly the wrong time for the government to pull back from the interventionist approach it has adopted in recent weeks. If Johnson and Sunak cut off the government lifeline to the economy now, they risk wasting the billions that have already been spent protecting jobs and businesses and triggering a downward economic spiral that could take years to escape. People’s livelihoods depend on them making the right choice.