“A furlough is a temporary leave of employees due to special needs of a company or employer, which may be due to economic conditions of a specific employer or in society as a whole. These furloughs may be short or long term.”

Wikipedia definition

When we look back at the economic turmoil caused by COVID-19, one thing will make the United Kingdom stand head and shoulders above the rest: Rishi Sunak’s furlough scheme [Formally named the Coronavirus Job Retention Scheme, it funded businesses to continue paying up to 80% of employees' salary for those that would otherwise have been made unemployed]. Whereas other countries have suffered massive unemployment and broken the link between employees and employers, in the UK the furlough scheme has kept business warm while on hold until the lockdown was lifted, and ready to move forward swiftly.

The Office for Budget Responsibility spelt this out in graphic detail for the October Budget. Permanent scarring of the UK economy was predicted to be 3% in March 21: now the OBR puts it at 2%, the Bank of England 1%, and Capital Economics estimates a maximum of ½ % – or possibly no long-term scarring at all. Sunak’s brainchild has paid back major returns.

The Financial Outlook provides the unabridged Budget speech, but the real story of this Budget is in the OBR upgrade. So in this commentary we show how this real strength draws a big contrast between the mid-70s and the current day, and we conclude that Boris and Rishi are right - this is a moment of real opportunity for Britain.

Public Sector debt might be higher than at any time since the mid-70s, energy prices might be rising swiftly - as in those days - and the spectre of higher interest rates may be lurking around the corner: but does this all mean that we're in danger of calling in the International Monetary Fund again? Absolutely not.

Capital Economics estimates that the Chancellor has banked the majority of the OBR upgrade: 50% of its benefits for the next two years, and 80% of its benefit for later years, no doubt keeping a weather eye on election timing so far as the latter is concerned.

But apart from the strong fiscal position, and notwithstanding the Chancellors stated determination to reduce the size of the state and the tax burden, let's consider the contrast between the mid-70s and today:

  1. There was no global pandemic in the mid-70s - it was purely a domestic UK crisis that brought in the IMF. Interest rates were already over 8% at the start of the crisis, compared to the decade of near deflation and rock-bottom interest rates that we have experienced since the 2008 financial crisis. There is no comparison here;
  2. Energy prices in the mid-70s were driven by Middle Eastern politics and striking miners. In contrast, the twist that has been applied today has been caused by Russia seeking to apply political leverage over Europe - but although we may not have got there yet, we are well on our way to building renewable energy alternatives to gas, and that type of strong arm tactics will not work this time; and
  3. Interest rates will push higher than this commentary estimated over a year ago, largely because we will see a flow-back into wages of the increases in factory-gate prices caused by supply disruption and energy costs. But today's society is not unionised as in the mid-70s, and the Bank of England is right to remain sanguine about interest rates in the longer term - the tech revolution continues to suppress price rises across the board, by supporting huge scalability in supply while demonetising demand.

So, Rishi Sunak is right to place his emphasis on investment for the future, and he is wisely supporting risk-takers and entrepreneurs by not following the Office of Tax Simplification ideas (see last week’s commentary).

Some of the biggest opportunities are in the provision of alternative energy, and this week's COP 26 Conference is the springboard from which these opportunities can flourish. That's why several of our podcasts this week take the long view - the origins of Greenpeace, the outcome of the Paris COP 21 Conference in 2015, and the prospects for hydrogen engines for the future.

If countries such as Russia and China will not join in this resolve to put the Earth on a more stable footing, that should not hold back the free world. In the 19th century there were many innovations which must have appeared somewhat of an indulgence at the time: but the industrial revolution paved the way for the huge efficiencies we have enjoyed throughout the 20th/21st century, and technology can do the same for the centuries ahead.

The United Kingdom is in a strong position to give leadership, thanks to Rishi Sunak’s furlough foresight - let us now be that ‘Global Britain’ and show the way forward.

Gavin Oldham OBE

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