Inside Rishi Sunak’s wage guarantee

In his third Covid bailout in just over a week, Chancellor Riski Sunak has shifted his focus from businesses to employees with an unprecedented three-month commitment to cover the bulk of pay for workers facing redundancy. He’ll cover up to 80 per cent of all salaried workers’ wages (up to £2,500 per month, around the UK’s medium income). This is a blanket pledge, an unprecedented intervention on the part of the government that will see the state pay private businesses – big and small – to retain their employees for the foreseeable future. 

The ‘Job Retentions Scheme’ is not targeted specifically at vulnerable sectors – presumably because any targeted scheme requires some form of means testing, which takes time. As a result, every employer can now apply to have a large part of their employees’ salaries covered by the state. 

It’s impossible to know how much this pledge will cost in total. Some rough calculations are being done by economists to the effect that there are five million people employed in vulnerable sectors earning about £320 a week, so this would suggest £18 billion over his timeframe (March, April, May and June). But there is no limit to what the Government will spend in total:  the scheme may be extended, depending on how long it takes to tackle Covid-19. Other pledges are easier to add up though, such as the ‘£30bn injection’ (which includes deferring VAT payments until the end of the financial year) and the increases to the Universal Credit standard allowance and the working tax credit, which will both be increased by £1,000 a year. For the self-employed, there will be no more self-assessment tax to pay until January 2021.

The Government seeks a V-shaped recovery, and wants to keep the economy intact, ready for a comeback. So it not only seeks to protect people in the short-term from a sudden loss of income, but to ensure people return to work on day one – and that’s only possible if they’re still employed. But keeping businesses and their employees afloat throughout this crisis is no cheap feat: his pledges earlier this week were already racking the deficit back to up post-2008 crisis levels. Now we are going a lot further, with no cap in sight. On the latest Coffee House Shots podcast, Fraser Nelson says that the blanket nature of this crisis means cash can be claimed by companies who are not on the edge and who don’t really need it: even in a boom year, at least 2,500 are made redundant every week as part of the basic economic churn.  This is the price of fast action.

This should dispel any doubts that the Government would do whatever was necessary (read: borrow what’s necessary) to support Britain through the economic consequences of Covid-19. But gone (again) are the days of relatively low Budget deficits. Getting the health service and the economy through this pandemic are now the government’s priorities – but these unprecedented measures will need to be accounted for in the not-to-distant future.

PS: There’s one big thing to keep an eye on. Sunak’s whole plan depends on the government’s ability to borrow cheaply. A week ago, he could do so paying 0.3pc on 10-year borrowing (ie, the ‘gilt yield’). The low rate is a sign of how willing the markets are to lend to the UK government, and is the biggest single factor now. A few days ago, market jitters saw that rate – the 10yr gilt yield – jump to 1pc. A massive intervention from the Bank of England (ie; printing £200bn in QE) brought this back to 0.6pc. Sunak is playing a delicate balancing game: he needs the confidence of the public, but also of the markets, whose money he is now depending on.