By Torsten Bell, chief executive of the Resolution Foundation
The covid crisis bears little resemblance to the financial crisis of 2007-08 in terms of its roots (a health emergency, rather than an economic one), scale (the biggest contraction for 300 years) and rapidity (already 750,000 fewer people are in paid employment). Understanding the unique nature of this crisis is key, especially for Government. One feature stands out – it affects different sectors in different ways.
Swapping an office for Zoom meetings is one thing; being ordered to close completely is quite another.Gaps between sectors stand out when we look at where workers have been furloughed.
Some 77 per cent of hospitality workers were furloughed at some point – 10 times the rate in finance. Take-up among micro firms has been 54 per cent, compared to 21 per cent among larger ones. The pace of return also varies. Construction saw almost half its furloughed workers return by the end of June, but there has been much less progress in getting furloughed workers in entertainment and leisure back to work.
The danger is that we ignore these differences in economic policymaking. That’s clear in the Job Retention Scheme, which has the same rules for all firms, and support for the self-employed, where the one-size-fits-all approach means some big winners. Take, for example, the self-employed person who has had two big grants from Government despite having almost no hit to their work from the crisis. Lucky for them, but not the best use of Government money.
We have seen some sector-specific help, such as the £1.7 billion bailout for the arts and the ‘Eat Out to Help Out’ scheme. But if we want to avoid a big rise in unemployment we need to recognise that while some sectors are already able to return to (almost) normal, others will be constrained for many months to come.
The main support for firms is due to end later this year or early next, with the Retention Scheme phased out in October and loan repayments starting in early 2021, along with deferred tax bills. This is a big gamble for firms in the worst affected sectors, and a rise in unemployment could be the result.
Weaker firms fail in any recession – but this crisis is unique, reflecting a temporary phase rather than a new normal. Many firms that are struggling now could prosper again in future.
It’s time policy adjusted. The Chancellor should phase out the Retention Scheme more slowly for hard-hit sectors, and change it from a scheme that subsidises people not working to one that helps meet employment costs in sectors where the crisis is temporarily increasing costs. This would limit unemployment and help keep more firms afloat.
To ensure firms can drive recovery without being overburdened with debt, we should convert the emergency loan schemes into student-loan-style, income-contingent loans, with repayments capped at five per cent of a firm’s annual revenue.
The UK economy is on the road to recovery, but we are a long way off business as usual. It’s time policymakers recognise that this has been a unique crisis in terms of its depth, sectoral focus and temporary nature. After all, that is what firms and workers are living with every day it goes on.
Torsten Bell is chief executive of the Resolution Foundation. Views expressed are those of the author and not necessarily those of FSB.