Will the new job support scheme create a new growth path?

With Chancellor of the Exchequer Rishi Sunak (@RishiSunak) announcing the government’s plans for a new scheme to replace the furlough initiative, Dr. Nicholas Apergis, Professor of Economics at the University of Derby (@DerbyUni), assesses whether it will be enough to help Britain recover from the impact of the Covid-19 lockdown.

The overview

A new job support scheme has been announced by the UK economic policymakers as part of Covid-19 support measures, and it appears to offer a fresh financial lifeline to workers and businesses as the winter ahead is expected to be highly detrimental to the labour market.

The goal is to protect viable jobs in businesses confronted with lower demand than expected (i.e. oversupply conditions in the labour market). This is intended to maintain workers in the workforce, even if they cannot work their usual hours. The scheme has been estimated to potentially cost about £300 million a month for each million employees covered by the scheme.

The economic idea of such a job support scheme lies with the Keynesians’ views which, emphasising demand-driven economic growth, have suggested the adoption of permissive fiscal policies with a positive (short and long-run) impact on the future path of economic growth.

Although the expected outcome is believed to be on the positive side, a strand of economic literature has raised the question of the sustainability over time of the public debt path. Therefore, let’s attempt below to evaluate the pros and cons of the recent UK’s supportive scheme.

The pros

As always in economics, fiscal economic decisions have two opposite views to read. In terms of the supportive jobs scheme and the policy implications associated with it, it provides substantial financial support to employees, as well as valuable assistance to businesses hit hardest by lockdown measures. In other words, the generous package provides a significant decrease in business taxes, leading to a beneficial reduction to the businesses’ working costs.

That offers much needed relief to cope with significant negative spillovers to the supply chains and to consumer spending.

At the same time, those tax reliefs have a significant positive impact on people’s disposable income, encouraging them to increase their spending on goods and services, thus reopening the business sector in terms of production.

Moreover, both positive spillovers are also expected to turn the market consumer and business sentiment on to the positive side, generating a virtuous cycle of production, consumption and investments.

Finally, the capacity of businesses to repay their bank loans (given that the majority of those businesses have turned to banking rather than to capital market funding) is expected to provide a significant boost to the banking sector to further increase its lending activities, and support both consumption and investment expenses.

The cons

By contrast, although this support package is not as ambitious as the one provided before summer (the furlough scheme), the impact on the course of fiscal deficit and public debt is expected to be negative.

Indignant deficit scolds – those who prefer to keep government spending under control – would have questioned how government plans to pay for them, while both economists and non-economists are complaining about burdening our future generations with debt and bankrupting countries.

The literature emphasises the presence of higher interest rates, allowing an easier financing platform for swallowing deficits and debts, as well as an appreciating pound with further negative implications for UK exports.

However, such supportive schemes do not seem as expensive or to have potential negative spillovers on certain sectors in the economy any more. Suddenly, governments implement ‘helicopter drops’ of cash.

It took a global pandemic to explode the myth that fiscal government spending has to be ‘paid for’. More specifically, central banks are there (in our case the Bank of England) to finance those programmes/schemes without jeopardising the risk of higher inflation, since the economy suffers from serious slack demand that is not expected to feed inflationary expectations.

In other words, a sovereign government can always afford to pay for expansionary programmes, as Modern Money theorists have long explained. Governments cannot run out of money because they simply credit bank accounts when they spend.

And the probable outcome is….

The newly introduced job support scheme is, overall, a positive measure. The economy will benefit and this will be reflected as higher income, spending and investments for the UK economy.

In addition, apart from any sovereign fiscal and debt constraints, the economy is expected to move rapidly onto the booming side of the cycle.

UK economic policy makers have clearly realised the critical role of the pandemic, not only for public health reasons, but also for the economy as a whole, while international economic leaders are still constrained by the chains of fiscal surpluses and the myths of lower fiscal debt levels.