How do you put an economy in self-isolation? It’s the question Rishi Sunak - our rookie Chancellor - has had thrust upon him by the Covid-19 pandemic.
Just as individuals face up to the reality of their movements and social contact being severely limited by the health emergency, businesses are also calculating the cost of their trading being suddenly constrained - and completely halted in some cases.
No business can survive that for long, and the Chancellor - still not 40 years old and one month into the job - has been forced to think the unthinkable in his measures to protect them. Most dramatic was his promise on Friday to fund 80% of the wages of company employees who would otherwise have been laid off, up to a limit of £2,500 a month and for an initial three months, although that could be extended.
That’s on top of a range of measures designed to ease company overheads through the tax system - extending relief on business rates and providing a VAT holiday.
The clear hope is that the hit to the economy can be time-limited, with as much demand as possible maintained so that the recovery can be as quick as possible. You can think of the economy in times of acute stress as being like a piece of elastic - it can be stretched a long way and will spring back, but if it’s stretched too far it will snap and then won’t fully recover. The Chancellor is trying to give the economy as much slack and stretch as possible, with workers kept in jobs so that they still have an income when restrictions are eventually lifted and trading can pick up again.
The scheme to pay worker wages changes the equation for company bosses and sends a firm signal that job losses are to be avoided for as long as possible. It may indeed save many jobs directly but it is likely to have an indirect effect as well. Any CEO contemplating redundancies now will be asked whether they could instead save staff by applying for funding through the scheme. Yet in doing that, and pushing their costs onto the state, they’d better be sure they’ve done all they can to avoid that course of action. The backlash against the company boss who asks the taxpayer to pay his workers while also enjoying a large bonus and paying shareholders a chunky dividend will be fierce.
The end result is likely to be companies doing more than in the 2009 recession to avoid job losses - and that should make a speedy recovery more likely. The effect on company balance sheets, however, is less certain.
For investors there should be an understanding that deep pain in the economy cannot now be avoided, and that will hurt shareholders. Yet we should be thankful that economic leaders, in government and central banks, have the experience of the 2009 financial crisis to draw on. The recovery in places like the UK was slow and the financial impact on individuals high. The government has been clear that it wants this time to be different.
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