Here’s what Rishi Sunak should do to avoid a ‘cliff edge’ drop in employment

What will Rishi Sunak do next? The centrepiece of the Chancellor of the Exchequer’s Covid-19 support package this year — the furlough scheme — is now drifting to a close. The timing is unfortunate. After all, the scheme was designed to limit the risk of mass unemployment during lockdown. Ending it now — even as various renewed lockdowns beckon — might be regarded as an act of folly.

Still, the furlough scheme has its weaknesses. Paying people to stay at home when there is only a limited prospect of their returning to work is, to say the least, an expensive policy. Encouraging people to twiddle their thumbs for an extended period of time threatens an erosion of key skills that, in turn, reduces future employability.

And furloughing workers in sectors which may have to shrink on a permanent basis may be simply putting off the inevitable. We now have a much better sense of where Covid-19 might be doing lasting economic damage. Even when a vaccine comes along, or we have an array of effective antiviral drugs, airlines may never be able to drum up enough business to keep all their staff gainfully employed. Many people who used to suffer the daily commute may, instead, opt to work from home. City centres may have no choice but to reinvent themselves. Zoom has a lot to answer for.

Rather than paying people to stay away from work, Sunak needs to find a way to encourage employers to bring some of those workers back. That might mean more part-time work, or job-sharing schemes, whereby previously full-time employees are given the opportunity to return for, say, half the week. The Government could usefully pay some of a worker’s wage. This, in effect, would be a “negative” employer’s National Insurance contribution, restricted to those companies experiencing severe lockdown-driven revenue shortfalls.

Such a scheme would still likely lead to a rise in unemployment. Companies would have to decide which workers they could afford to bring back from furlough. If a firm’s sales were depressed, not all employees would be able to return, even with wages supported by government subsidy. Still, such a mechanism would avoid the “cliff-edge” drop in employment that might otherwise transpire. It would also reintroduce some element of market discipline. In a normal year, many thousands of businesses fall by the wayside. Covid-19 cannot be used as an excuse to preserve in aspic the inefficient, the unproductive and the obsolete.

There may even be fiscal room to redeploy those who may lose jobs. True, the budget deficit has grown like topsy in recent months but, with borrowing costs incredibly low, this might be the moment for the Government to think about concrete “levelling-up” plans. In other words, Sunak needs to be more targeted with his generosity. We know a bit more now about the impact of Covid-19 on the economy. And we need the economy to adjust in the right direction.

Sunak also needs to be aware of possible pitfalls. Sterling dropped rather rapidly a week or so ago, driven down through a combination of “no deal” Brexit fears and indications that the Bank of England is contemplating the introduction of “negative” interest rates. The foreign exchange market might be maddeningly inconsistent at times but it is a useful barometer of investor confidence in a nation’s policies. Post-war British history is littered with sterling crises, from the 1967 devaluation through to the 1992 departure from Europe’s Exchange Rate Mechanism (ERM). Typically, the political damage is greater than the economic damage. Put simply, sterling crises are often a vote of no confidence in a government’s handling of the UK’s economic affairs.

The Government may now have to borrow even more just as our trading relationship with the EU deteriorates thanks to a “no deal” Brexit. More borrowing at home alongside lower export earnings points to a widening balance of payments deficit. Encouraging foreigners to fund that deficit requires higher interest rates yet, with rising unemployment and renewed lockdowns, the Bank of England is determined to do exactly the opposite.

Something will have to give. It may already have lost some of its value but the pound remains the weakest link. If so — and with apologies to Anne Robinson — it may still not be a good buy.

Stephen King (@KingEconomist) is HSBC’s Senior Economic Adviser and author of Grave New World (Yale)