Johnson’s Lackluster New Deal Puts Pressure on Sunak to Act

(Bloomberg) -- The lukewarm response to the modest infrastructure boost Prime Minister Boris Johnson promised is piling pressure on Chancellor of the Exchequer Rishi Sunak as he prepares to unveil a stimulus package to cushion the blow of what could be the worst recession in three centuries.

With job losses mounting, Johnson's pledge this week to “build, build, build” Britain back to economic health -- a program he likened to the New Deal that rescued the U.S. economy following the Great Depression -- ran into criticism, not least because the 5 billion pounds ($6.25 billion) announced was an acceleration of planned spending rather than new money.

More damagingly, the policy itself has also been questioned. While infrastructure spending may help address inequality and fulfil promises made in last year's election campaign to “level up” poorer regions, there are doubts that it can deliver the immediate boost to growth now required.

The spending outlined by Johnson amounts to little more than 0.2% of gross domestic product – meaning its impact risks being insignificant at a time when the coronavirus-stricken economy could contract by more than 10% this year.

“In the short-run that's not the way to stimulate,” said Morten O. Ravn, a professor of economics at University College London. “Money would be better spent fast, and that typically would be on things like increasing wages of low-paid workers.”

Over to Sunak

The onus is now on Sunak to do more to fix the short-term situation when he addresses Parliament on July 8, with economists and think tanks calling for spending targeted at the worst-affected sectors such as hospitality and measures to protect jobs. That could include an industry-specific extension of his existing support for workers and companies.

There is also talk of Sunak cutting value added tax on sales to spur spending, though the chancellor himself appeared to play down the prospect last week. Wage subsidies and reduced opportunities to spend mean that household finances are in “reasonably robust shape,” he said in an interview with Bloomberg Television.

Carl Emmerson, deputy director of the Institute for Fiscal Studies, said lowering VAT is a tool to “keep in the locker for now,” until it is clear whether households are willing to spend freely once restrictions are lifted.

“If we see shops opening and there are queues outside of those shops, for example, a VAT cut is not going to help,” he said in a joint webinar with the National Institute of Economic and Social Research this week. Measures to encourage firms to retain and take on workers would be preferable, he said.

Niesr Director Jagjit Chadha joined the chorus of voices urging Sunak to do make his statement count. A mere economic update would leave the U.K. at risk of “jumping from policy statement to policy statement” without understanding the crisis, he said.

The fear is that employers may start firing workers once they are asked to take on more of the huge cost of furloughing next month.

The Job Retention Scheme, which is due to end in October, is currently paying the wages of more than 9 million jobs. If even a fraction of those roles disappear, unemployment could easily hit 10%, a level not seen since the early 1990s. Sunak acknowledged the “very tragic projections for what might happen to employment” unless action is taken.

Recent days have brought a spate of bad news. Airbus SE and EasyJet Plc are considering reducing U.K. staff, while a number of high street firms, such as suitmaker TM Lewin and SSP Group, owner of the Upper Crust sandwich chain, have also said the pandemic is putting jobs at risk.

Worse could be to come. The British Chambers of Commerce's quarterly survey showed measures of sales, orders and cashflow in the dominant services sector have plunged by the most in its 31-year history, while two-thirds of firms reported a worsening cash position.

‘Laser Focus'

On Friday, Anneliese Dodds, who shadows Sunak for the opposition Labour Party, said job losses are set to continue piling up unless bespoke help, including extending furloughing, is made available for sectors that have little prospect of reopening anytime soon.

“We need a laser focus on jobs, jobs, jobs” in an emergency budget next week, Dodds said. Rather than generalized tax rises to pay for the spending, the wealthy should take more of the strain of any increases, she said.

Accelerating investment “can play a helpful, but small role” in supporting the recovery, but the commitments made by Johnson “are a long way from being an answer to the biggest jobs crisis our country has faced in a generation,” said Torsten Bell, chief executive of the Resolution Foundation. “All eyes are now on the chancellor to deliver a much more significant plan to drive the recovery in the months and years ahead.”

Read more: Airbus Warns 15,000 Job Cuts ‘Not the Worst Case' Scenario

David Owen, chief euro economist at Jefferies International Ltd., agrees that Sunak, who has earned widespread plaudits and seen his popularity grow as a result of his response the crisis, remains key, even if next week doesn't see major fiscal stimulus.

“They need a very targeted response to try to create jobs for people for whom the labor market isn't going to return to normal,” he said. “What's been announced so far isn't adequate -- it's not an appropriate response given what we're seeing.”

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