Rishi Sunak will have to switch tactics to keep the economy moving – it won’t be easy but this is how he might do it

The government’s economic programme so far has been to borrow almost without limit and pile the money into the economy in a number of different ways. But it can’t do that forever, says Hamish McRae

The chancellor has to find some way of buffering the end of the furlough scheme (PA)

The economy is switching on again. On Wednesday, the chancellor has to switch tactics to keep it moving.

Whatever you think of the public health aspects of the government’s handling of the Covid-19 crisis – and it is hard to be kind – the economic damage seems to have been reasonably well contained. As Andy Haldane, the Bank of England’s chief economist, argues at the moment the economy is emerging from a V-shaped recession. Most economic data is rear-view mirror stuff. The numbers tell you what was happening a few weeks earlier. Real-time data – things like electricity demand or rush-hour traffic – give a glimpse of what is happening now. So the challenge is to keep it moving up the right-hand side of the V. This will not be easy.

The government’s economic programme so far has been to borrow almost without limit and pile the money into the economy in a number of different ways. But it can’t do that forever. At some stage money borrowed will have to be paid back in one of two ways. Either the debt will be reduced by higher taxes, which at the moment is unthinkable. Or it will be whittled away in real terms by having inflation higher than interest rates, in which case the burden will be on savers. (The small coterie of economists who argue that the national debt will never need to be brought down tacitly accept that the savers who hold the debt will end up being the payers.)

But we are a long way from even thinking about repayment, and the faster the economy can recover, the lower the ultimate burden. On Wednesday Rishi Sunak has to come up with a package that keeps things moving.

There are two broad problems here. One is that you don’t want to use taxpayers’ money to support businesses or sectors that are doing fine. These include the online retailers, the pharmaceutical giants, and so on. Instead it is the sectors that have been hardest hit, such as the hospitality and entertainment industries that desperately need help. But these businesses are often small ones, and have disproportionate numbers of casual and self-employed labour. They also tend to employ the young, the group in economic terms most severely hit by the pandemic.

The issue is how to target funds to where they are most needed. For tourism half the summer has been lost, which is in effect half the year. How do you enable businesses to keep going through the winter until another earnings season opens? How do you stop theatres from closing forever?

The second problem is jobs. The furlough scheme has worked reasonably well, but will now be wound down from August and on current plans be ended on 31 October. The chancellor has to find some way of buffering the end of the scheme, so that people are not unnecessarily put into standard unemployment terms. Eventually furloughing has to end. But it has to be done in such a way that supports a job-rich recovery such as happened after the 2009 recession.

There are lots of ideas around, including one from the Resolution Foundation to give out vouchers worth £500 for people to spend on sectors hardest hit, such as face-to-face retail and hospitality. It may sound a bit rum that we should have to pay to go to the pub, but this one is rather clever. If you simply hand out money, as they have in the US, that is often saved rather than being spent. Great for household finances in the long-term if it is used for paying down credit card bills, but not much use for the economy right now. Or it might be spent on sectors, such as online retailers that are booming already. It will be interesting to see if Rishi Sunak picks this one up.

All this costs money. But there are two encouraging features of public finances right now that limit the damage. One is very low interest rates on government debt. The Bank of England has recently issued 30-year gilts to near-record demand. On Friday they were trading at a yield of 0.65 per cent. From the point of view of savers and pension funds this is dreadful. As noted above, it looks like being savers who will foot most of the bill for the pandemic. But from the point of view of the treasury this is wonderful, because it means that it can scoop up money now to reduce the overall costs of funding the national debt.

The other is that tax leakage will be radically cut by the shift away from cash payments. There are many social reasons to want to preserve physical cash as a method of transaction. Many people either don’t trust cards, or at least trust themselves to use cards wisely. And there are many who don‘t see why they should be forced to carry a mobile phone. Why should everything we do be tracked?

However from the point of view of the revenue, a shift away from cash closes a massive loophole. Whatever happens as normal business resumes, one of the lasting changes will be a decline in folding money.

Nice to have those silver linings amid what are still some very dark clouds. How dark we will learn more about on Wednesday.