Thoughts through the cycle: W3 February ’21

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Rishi Sunak might be learning that it’s harder to end a war than to start one

  • Keir Starmer became leader of the UK’s Labour Party in April 2020. One might have thought that being Leader of the Opposition in 2020 would have been a fairly straightforward job. Boris Johnson has a reputation for opportunism and Britain’s remain-leaning media hates him because of Brexit. Managing the country during a pandemic would be difficult even for a Prime Minister without a reputation for buffoonery. It is therefore a bit of a surprise that Mr Starmer finds the need to ‘relaunch’ himself so soon after taking the top job.
  • In an opinion piece by Sienna Rodgers (‘Keir Starmer’s vision for the economy is something the Labour Party can rally around’, Guardian, 19/02/2021), we finally learn what Mr Starmer stands for:

“He drew dividing lines ahead of the budget, saying he would keep the universal credit uplift, end the pay freeze for key workers, prevent council tax rises, extend business rates relief and the VAT cut for hospitality and leisure,and renew the furlough scheme. It tied together the themes we’ve seen in Labour’s interventions over the past year: family, dignity, security, fiscal responsibility and long-term thinking.”

  • This is all well and good until you look at the graph below which shows the UK’s primary budget deficit. The UK deficit is spiralling as a result of the lockdown-related policies. Whatever the long-term consequences of the Covid-19 pandemic, the decision to lockdown the economy was a political one, and this means the fiscal consequences (particularly the furlough) are the government’s responsibility. With a Tory government spending so much, what is the point of Labour? This is the principal reason why Keir Starmer is struggling. It was a problem even before the pandemic – don’t forget Boris turning the red wall blue with his pro-Brexit populism in the 2019 general election.

Source: Bloomberg, 19th February 2020. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

  • The travails of Keir Starmer and how he would spend money are nothing compared to the problems facing the Chancellor, Rishi Sunak. His problem is the opposite one – an instinct (it seems) to show fiscal prudence during a period of wartime levels of deficit expenditure. The latest data from the Office of National Statistics (ONS) shows the UK primary budget deficit between April 2020 and January 2021 was a whopping £270.6bn.
  • Governments generally run budget deficits of epic proportions during wartime. The logic is that the exigency of a national emergency demands fiscal probity be side-lined in the interest of national survival. This was, for example, the case in 1939. While World War II thankfully ended in 1945, it was followed by a period of punishing austerity as Britain tried to export its way out of its war debts to America.
  • After austerity in 2010, any renewal of the austerity policies would be political suicide for the Government, doubly so because they chose lockdown. In any case, post-war austerity was caused by a need to favour exports to raise dollars to pay the US. Wiley foxes that they are, by borrowing in pounds, the Government can get the Bank of England (BoE) to monetise the deficit through quantitative easing (QE), although BoE Governor Andrew Bailey claims this isn’t the case.
  • So what is a Chancellor of the Exchequer to do? The problem starts with employment. In a speech on 18th February, BoE Monetary Policy Committee member Michael Saunders was quoted on Bloomberg as follows:

*SAUNDERS: U.K. UNEMPLOYMENT TO RISE WHEN FURLOUGH ENDS

*SAUNDERS SAYS HE WILL PUT A HIGH WEIGHT ON LABOR MARKET DATA

*SAUNDERS SAYS GDP SURGE WITH HIGH UNEMPLOYMENT NOT A BOOM

*SAUNDERS: SIGNIFICANT SCARRING A RISK AS COVID CRISIS LINGERS

  • The question about ending the furlough is the key one. The graph below shows UK unemployment for the last 50 years. Since the pandemic, unemployment has risen to 5% (as of November 2020). The latest data suggests that 17% of the UK workforce is currently on furlough, so the real unemployment could, hypothetically, be anywhere between 5% and an almost unthinkable 22%, a level that equals some estimates of the Great Depression.

Source: Bloomberg, 19th February 2020.

  • Clearly when lockdown ends and we can finally go for a pint, a lot of employment in the hospitality and leisure industry will return. One would also expect a return to work for many in the retail, health, and beauty sectors, and so on. But for many, there exists the horrific prospect of a benefit cliff or unemployment when furlough ends. The British Chamber of Commerce suggests that a quarter of British businesses will sack people if furlough finishes at the end of April (‘One in four UK firms plan to fire if furlough ends soon – BCC’, Reuters, 18/02/2021).
  • In addition, ahead of the UK budget on the 3rd March, there are worries in other quarters of an end to the emergency benefit supplements, which have been helping people during the crisis. The £20 per week Covid-19 top-up appears to be at risk of being curtailed (‘Cutting Covid top-up ‘will put 700,000 people into poverty’’, Guardian, 17/02/2021).
  • It’s not just furloughed workers and those on benefits who face disruption. Estimates suggest that around £4bn (or 20%) of commercial rents have not been paid due to the pandemic, and landlords, not expecting struggling retailers to be able to stump up the cash for rent while they’ve been closed, now expect their mortgage lenders to take some of the pain (‘UK Landlords Want Banks to Share Pain of $5.5 Billion Debt’, Bloomberg, 02/02/2021).
  • What about the retailers? There are suggestions that the upcoming budget will see an extension of the year-long business-rate holiday for the retail, hospitality, and leisure sectors in order to give these businesses much-need breathing space while they struggle with what are likely to be ongoing and onerous Covid-related restrictions (‘Sunak delays business rates review until autumn’, FT, 19/02/2021).
  • Job on your hands there, Rishi? One can either have a furlough or not have one, and as the amount of money in furlough 2.0 is already lower than the initial amount offered last spring, the potential threat to workers of a cliff-edge is clear. This is the real price of the lockdown. It is most likely that the generally good-humoured way in which Britain has dealt with the various restrictions to personal liberty as a result of the pandemic derives from a widely held belief in a return to normality when it’s all over and a belief that the cost to individuals will therefore not be that great (if anything at all). Sadly, they may be wrong on both accounts.
  • The Resolution Foundation suggests that the pandemic has left 450,000 of 750,000 households in arrears with respect to housing payments who have now fallen into debt even when not paying their mortgages, such is the disruption to incomes despite furlough and the extra social security support (‘Pandemic has left 450,000 in hosing debt, study finds’, FT, 17/02/2021). Any disruption to benefits at this stage will only exacerbate this problem.
  • It is not as though local councils have avoided the trouble either. The Chartered Institute of Public Finance and Accountancy estimates that 22 local authorities are in talks with the Government on Section 114 notices (the equivalent of insolvency for local-government entities), and that this may only be the tip of the iceberg, such has been the fall in revenues, especially given the prevalence of unwise commercial property acquisitions in recent years (‘Cash squeeze tips more councils close to bankruptcy’).
  • So, while the papers are talking about avoiding tax hikes and continuing stamp-tax holidays, this is a bit like holding a victory parade while the troops are still in contact with the enemy. The wartime analogy is appropriate for a specific reason. The picture below shows the front page of Money Week magazine’s December 2020 issue. This is all about stonks, moon-shots and tendies (if you don’t get the lingo you’re not with the programme, boomer).
  • The simplified narrative is that when the Spanish flu ended, the roaring 1920s ensued. The real story was that as World War I ended, there was a Great Depression in the US (which was called ‘Great’ until the one 10 years or so later became greater), and only after that collapse did a boom ensue.
  • From a fiscal point of view, lockdown was like declaring a war. When wars finish, there is generally a huge slump, and the examples above relating to workers, businesses, councils and so on show who will take the hit should that happen. Given this lockdown was a political decision, the problem now facing governments in the UK and elsewhere is how to end the war-time spending without the usual post-war slump. Keir Starmer should be thanking his lucky stars he’s only Leader of the Opposition, because that question is a real doozy.

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