September has been a cruel month for Rishi Sunak.
Just weeks after the chancellor’s “eat out to help out” scheme that got people out in restaurants in August was hailed as a triumph, Treasury officials found themselves back in firefighting mode again, illustrated by confirmation on Wednesday that the autumn Budget had been scrapped.
Mr Sunak will give more details in a statement to the House of Commons on Thursday, which will include “creative” plans to find replacements or extensions for the job retention scheme and business loans schemes rather than allowing them to wind down.
The outlook for an economic recovery in the run-up to Christmas had already worsened before concerns over a rise in coronavirus infections forced ministers to order early closing across the hospitality sector and to reverse course on urging employees to go back into offices. Uncertainty over a post-Brexit trade deal has added to the challenges.
The greatest blow to Mr Sunak has come from the pandemic’s resurgence. The economic plan he had set out in July was based on the assumption the virus would be contained by an effective test-and-trace system that would mean local restrictions could be used to deal with any outbreaks.
Instead plans for six months of new nationwide measures are expected to undermine the strong recovery in the economy since June. A sustained rebound would have allowed Mr Sunak to phase out costly measures, including the job retention scheme and emergency business loans and grants that were designed to bridge the lockdown period.
Torsten Bell, director of the Resolution Foundation, said the chancellor needed a new strategy. “The Treasury approach, which was waiting to see how the economic and health situation played out in the autumn, now needs to change. The idea that you can phase out support while phasing in restrictions is not fit for purpose.”
Officials have been scrambling to devise a new strategy in recent days. The first element of that is postponing key economic events in the Treasury’s diary, including the Budget.
Without a Budget, there is no need this autumn to set a long-term plan for the public finances or think about the scale of tax rises that are likely to become necessary once the long-term economic damage from the pandemic is known.
But a spending review must still take place before the end of November to give government departments and local authorities time to plan their own budgets for next year. Officials have not yet decided whether to set multiyear budgets or just plans for 2021-22.
The second part of the plan involves the extension of parts of the government’s pandemic support package to tide companies over as infections rise.
Officials have been in regular contact with the CBI employers’ organisation and the Trades Union Congress over a new wage-subsidy scheme to replace furloughing. This is aimed at supporting companies that can afford to take back those employees still on furlough on reduced hours and ensure the taxpayer does not continue to pay out very large sums to people who have not worked since April.
Allan Monks, UK economist at JPMorgan, said “the proposal would effectively be an extension of the existing furlough scheme, but on much less generous terms”.
The third part of the new strategy seeks to retain as much of Mr Sunak’s longer-term thinking as possible, with one of the main focuses being on helping those in jobs made unviable by the pandemic find new employment.
Young people, who are most at risk of long-term unemployment, will be able to join the £2bn Kickstart scheme which launched this month and offers generous wage subsidies to employers for hiring them.
If the overall new strategy works, it would allow Mr Sunak to get the economy through another tough spell in the hope a coronavirus vaccine would be available by next spring.
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But no one inside the Treasury can be confident of success. Gus O’Donnell, former head of the civil service, will highlight the difficulties ahead in a speech to the Institute for Fiscal Studies on Thursday in which he will urge ministers to get a grip on the response to the virus.
“A litany of new rules and a steady stream of leaks reflects a government struggling to emerge from firefighting mode,” he will say. “Without a clear strategy, strong leadership and the use of good evidence from a range of human sciences, there is a risk that our efforts to emerge from this pandemic will be protracted and extremely costly.”
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