Sunak’s crisis-fighting measures: time to scale up?

This week the Chancellor Rishi Sunak unveiled his “Summer Economic Update.” In case it’s not clear, this wasn’t technically a Budget. That said, it still contained more policy than all but three of the fiscal events we’ve had since the onset of the financial crisis more than a decade ago. So, it was a big deal. But was it the right deal?

What seems, understandably, to have captured most attention is the types of measures announced. There was a real mix of the tried-and-tested, as well as new ideas, in the chancellor’s £30bn package. While cuts in stamp duty and VAT have a feel of the financial-crisis playbook about them, a job retention bonus and an “Eat Out to Help Out” discount continued the creative policy making that we have seen from Sunak in his short time in post. Predictably, the main political parties traded barbs over what had been announced, with Labour questioning the effectiveness of a “Meal Deal,” while the government badged the package as a Roosevelt-esque “New Deal.”

Some of this is certainly important: the question of what kinds of policies should be put in place matters a lot given the highly sectorally-concentrated nature of this crisis. Official data shows that the output of the hospitality sector—where many low-earners work—collapsed by more than 90 per cent between February and April. The equivalent data for financial services points to a fall of just 5 per cent. This means we need policies targeted towards the hardest-hit parts of the economy.

But another important question concerns how much policy we need. Answering this question is harder—so it often gets left out of the debate. To answer it, you need to keep two important things in mind.

The first is that there is going to be an enormous hit to the economy. While perhaps the only issue that there’s little doubt about is that there is a lot of uncertainty, both the IMF and the OECD think we’re heading for the weakest year of growth in over 300 years. This on its own means that policy should be doing a lot in order to reduce the hardship caused and minimise the long-term economic damage.

The second is that we can’t fight this crisis in the way we have in the past. In those previous recessions the Bank of England did most of the heavy lifting in supporting the economy. By cutting policy rates by an average of five percentage points in post-war recessions, monetary policy has tended to provide a big boost. But this time it’s different, with the Bank—already close to its limit—having cut rates by little more than a tenth of that past-recession average.

All this means that, while the chancellor has done a lot, he will need to continue his bold policy making and do more than anyone in his position has done before. While in the financial crisis total fiscal stimulus amounted to less than £100bn in today’s money, he will almost certainly need to spend a lot more than the £190bn or so he has done so far to head off the risk of a large rise in unemployment.

How much more will ultimately depend on how the virus progresses and the timetable for finding a vaccine or other long-term solution to the crisis. But in recent Resolution Foundation work, we estimated that around £200bn on top of the pre-Update crisis measures might be roughly the right order of magnitude, if the virus continues to recede and the government is able to open the economy in line with its current strategy. That is an eye-watering sum, but it’s roughly how much it would cost to equal the combined support from fiscal and monetary policy in the aftermath of the financial crisis.

So, while £30bn sounds like a lot—and of course any support for jobs of this size is most welcome—it is likely that the chancellor will need to return in the Autumn with further support for demand and employment. Call it a new new deal.