Rishi Sunak’s mini-budget will be the most leftwing in years. Can Labour capitalise?

Back in December, a major plank of the Conservative party’s general election strategy was to portray Jeremy Corbyn as a Marxist throwback, committed to all sorts of dangerous 1970s lefty ideas such as state ownership and higher public spending.

Six months later, Boris Johnson felt the need, when announcing plans to bring forward £5bn of investment in Britain’s clapped-out public infrastructure, to reassure voters that he was “not a communist” and still believed in capitalism.

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It’s easy to see why the prime minister felt the need to provide some reassurance to his party’s traditional supporters, who believed the Conservatives stood for a small state, free enterprise and sound public finances. Johnson has nationalised the railways, is paying the wages of about a third of the workforce and is on course to borrow more this year than any other prime minister in peacetime. If Corbyn had announced that he was prepared to take a stake in strategically important companies to stop them going bust, Johnson would have been the first to accuse the former Labour leader of “picking winners”. In a Covid-19 world, it is what the government does, if more out of necessity than conviction.

Rishi Sunak’s summer statement on the economy on Wednesday is another indication of how things have changed in the first half of 2020. Normally chancellors are tight-fisted in the first year of parliament, getting all the tough decisions on tax and spending over with early so that they can hand out some goodies as election time approaches. They certainly don’t have mini-budgets where they announce that money’s no object if it means saving the National Theatre, or preventing the dole queues from lengthening to four million by the end of the year.

In the current circumstances, that approach makes sense. The easing of lockdown restrictions means that economic activity is picking up, but nobody knows how rapid the recovery will be, or whether it will be sustained. Two weeks after non-essential shops were allowed to open in England, retailers reported that footfall was 50% down on a year ago. And when the bars of Birmingham, Leeds and Manchester opened at the weekend, the droves of drinkers many predicted didn’t really materialise.

To be sure there are experts – Andy Haldane, the chief economist at the Bank of England for one – who think that the economy is recovering more quickly than expected, but the risk for Sunak is of doing too little rather than too much. His decision to end the government’s furlough scheme in October – when the jobless total is likely to be rising fast – is a colossal gamble and, quite possibly, a huge blunder. State spending takes on extra importance when unemployment is rising because the threat of redundancy leads people to save more. The drop in private spending makes the recession worse unless the government compensates by spending more itself.

Michael Devereux, an Oxford university professor, says Sunak should consider topping up the wages of people who have returned to work but are operating at below full capacity, which makes sense given that it will take a long time for many businesses to return to normal trading.

It is unlikely to happen though. In part, that’s because of traditional Treasury concerns about handing money to employers who might not need it. It’s also because this is a government that feels queasy about many of the things it is being forced to do.

Thus far, there is nothing historically exceptional about what Johnson’s administration has been doing. Governments in the past have expanded the role of the state. They have used fiscal policy – tax, spending and borrowing – aggressively during recessions. They have bailed out troubled companies. They have argued that higher spending on infrastructure will pay for itself by shifting the economy into a higher gear.

The problem for the Conservatives is that parties of the left have traditionally been more comfortable pushing these policies than parties of the right. Johnson likes to talk about his brand of one nation Conservatism, but somehow or another he has ended up with an economic strategy rather like that of Harold Wilson’s 1964-70 Labour government, with its National Plan for growth, high levels of public spending and belief in the transformative power of science and technology. It is certainly not Thatcherism, which is why free-market thinktanks are uncomfortable with the government’s direction of travel.

For the time being, there is not much those who think Johnson’s dalliance with dangerous leftwing ideas will end in tears can do about it. They can point out that in some ways the lockdown has highlighted the strengths of the market, with many businesses finding all sorts of creative ways to keep themselves going. They also make the point that the way the government has handled the crisis – from its Soviet-style targets for testing to its chaotic air bridges – has not always been the best advertisement for an activist state.

Politics goes in cycles and there will eventually be a moment when that thinking resonates with the public, but not now. For the moment, if the opinion polls are to be believed, voters are far more receptive to more stimulus and a rolling back of welfare cuts. The Resolution Foundation thinktank’s proposal for a £200bn spending boost, complete with £500 of spending vouchers for every adult, is far more in tune with the public mood than a return to austerity.

This is not entirely surprising. As the shadow business secretary, Ed Miliband, said on Tuesday, a pandemic is the ultimate collective action problem: it is simply not feasible to tell workers and companies that they must survive on their own as best they can when the government itself has been responsible for shutting down the economy.

Nor is the mood likely to change all that quickly. The recession of the early 1990s was cured by Britain leaving the exchange rate mechanism on Black Wednesday. Pouring money into the banks was the turning point in the financial crisis of 2008. This time, only a vaccine for Covid-19 will do the trick, and that could be years away.

All of which creates a glorious opportunity for the Labour party. It is in the happy position of being able to say that no matter how much the government is spending it should be spending more. It can pick and choose from all the once taboo ideas – such as a basic income, a wealth tax, or printing money to pay for higher public spending – that have become fashionable. A green new deal is now so much part of the mainstream that the prime minister sees himself as the new Franklin D Roosevelt.

A word of caution, though. Even assuming that Labour embraces the need for more radical action on global heating, it is not actually in power and won’t be for some time. The government has four years to patch up a dysfunctional economy which, despite all the rhetoric, is what Johnson’s strategy is really all about.

• Larry Elliott is the Guardian’s economics editor