Three mini-budgets from the chancellor in four weeks isn’t normal. But then nothing much is these days. This trilogy started at the end of September, with the winter economy plan. The name gives you a clue that this was meant to be the plan for the whole winter. Far from getting through to the spring, the plan’s flagship policy didn’t make it to the end of October before being totally reinvented by the Treasury last week in the third instalment of this economic policy saga.
The policy in question is the job support scheme (JSS), the replacement for the furlough scheme that ends a week today. For those returning to work for a fraction of their previous hours, the scheme pays them two-thirds of their wages for the hours not worked. The chancellor, Rishi Sunak, said its goal was to give businesses “the option of keeping employees in a job on shorter hours rather than making them redundant”. That is the right aim, but the scheme didn’t give many firms that option. It was too expensive, asking firms being hammered by this pandemic to pay a third of wages for hours not worked.
This design flaw was obvious a month ago. As we at the Resolution Foundation pointed out within minutes of the chancellor’s announcement, there’s a reason other short-hour work schemes, like that in Germany, do not ask employers to pay towards the costs during downturns. Government’s response was that our analysis might be right on a spreadsheet but didn’t reflect the real world. You didn’t need a spreadsheet to tell you that the scheme incentivised firms to keep one worker on full time rather than two on half-time, which is not how you reduce the coming rise in unemployment.
On Thursday, the chancellor recognised this reality, slashing the employer contributions from 33% to 5%. What sounds like a tweak is a revamp of the JSS, turning it into a functioning short-time work scheme. The cost to an employer of keeping two staff earning £17,000 on for half their usual hours has fallen from £233 to just £35 a month – an 85% reduction. This will make a huge difference to take-up, incentivising firms to cut hours, not jobs. It won’t be cheap, increasing its cost many times over, but it will lead to lower unemployment and protect household incomes.
So we’ve got to the right place, albeit too late, with the now heavily revised scheme set to go live in seven days’ time. It’s worth asking how this mess happened, because there are lessons for policymakers. Fundamentally, this is a classic case of optimism bias. The hope that the summer pause in the pandemic would last was understandable, but a terrible basis for policymaking. It, combined with talk of a V-shaped recovery, lies behind this painful display of economic policy slowly catching up with the return of the virus. High employer contributions might have made sense if we were phasing out lockdown restrictions, but make little sense when we are ramping them back up.
Optimism bias is something almost all of us are guilty of. In our private lives we tell ourselves we’ll make it on time even when it’s clear we’re running late and it’s a common pandemic survival technique not to admit to ourselves quite how long this will go on.
This same optimism bias explains why it took until Wednesday for the government to confirm that this autumn’s spending review, which was set to hand our departmental budgets for the coming three years, had been scrapped. It’s been clear for months that we’re in no position to plan public spending three years ahead right now, and only placing a lot of value on hope over evidence would make you think otherwise. We don’t know what we’ll be spending next month, let alone in 2024. Underpinning this optimism bias is a misdiagnosis of our pandemic-stricken labour market. We’re regularly told that, while it’s sad jobs are going in sectors such as hospitality and leisure, it’s best for those workers to enter unemployment because they’ll swiftly find jobs in less pandemic-hit parts of the economy. This works in textbooks but ignores the evidence. The UK is seeing the largest rise in unemployment in over a decade. That is driven more by huge falls in the chances of someone out of work finding a new job than by increased job losses themselves. Far from growing fast and hiring, even firms less affected by the pandemic have stopped investing, given the huge uncertainty.
The real lesson here is that, while optimism bias may be a human flaw that we all live with in our private lives, it’s a dangerous force in politics. History shows us that previous pandemics lasted years not months, and that second and third waves were common. In a pandemic it’s fair enough to hope for the best, but policy needs to be set with a closer eye on the painful and messy reality.
• Torsten Bell is chief executive of the Resolution Foundation