Let UK pay levels and working hours adjust to the market, says top BoE economist

London — The Bank of England’s (BOE’) chief economist has thrown his weight behind the government’s controversial plan to let its wage-support programme end, saying that prolonging it could delay the economy’s much-needed restructuring.

Calls have been mounting for the subsidies to be extended beyond September, but Andy Haldane said a better way might be to let pay levels and working hours adjust to the market. At the same time he signalled that companies may need help managing the debt burdens they have built up during the pandemic.

A “more flexible approach to the world of work and the way of running businesses might be one of the things that protect us from too many more job losses”, he said in an interview with City AM published late on Monday. “That would be a less painful way of businesses adapting now, if the burden were shared across the workforce.”

Haldane’s remarks echo arguments made by both his boss, BOE governor Andrew Bailey, and chancellor of the exchequer Rishi Sunak, who is seeking to wind down support that has seen government debt balloon to over £2-trillion for the first time.

It’s a potentially explosive strategy though, because it could see millions of workers take pay cuts or lose their jobs altogether.

British employers planned more than 300,000 redundancies in June and July, according to government data on proposed dismissals obtained by the BBC. Despite the state support for wages, employment slumped by 220,000 in the second quarter, the worst decline since the global financial crisis.

“Keeping all those jobs on life support is in some ways prolonging the inevitable in a way that actually doesn’t help either the individual or the business,” Haldane said. “Our job as policymakers is to make that process of adjustment as seamless and as painless as possible.”

Some European nations, including Germany, have already decided to extend their own aid programmes given concerns over persistent coronavirus infections and the lack of a vaccine.

The UK’s aid is currently set to end on October 31, which many industry groups and some lawmakers argue is too soon to prevent large-scale job losses. The BOE’s central forecast anticipates unemployment could almost double to 7.5% by the end of 2020.

Debt dilemma

Haldane also told the newspaper that onerous debt payments for businesses — after they accepted state-backed loans during the crisis when cash flows dried up — could slow growth, and signalled that he sees a potential need for relief.

“Is it reasonable to expect that to be paid away” by companies “in a way that doesn’t affect their hiring and their investment?” he said. “And if not, how best can that debt burden be lightened?”

Firms are already warning they will struggle to pay back government-guaranteed financial support from banks they received during lockdown, adding a new threat to Britain’s fragile economic recovery.

Over 40% of the mostly small and medium-sized businesses surveyed by the British Chambers of Commerce and TSB said they took on such debt in the crisis.

Of those, one-in-four said they may have to scale down operations to repay it, and one-in-10 believe they could have to cease trading altogether. That risks creating the kind of longer-term economic scarring that BOE policymakers have warned about.

On the state of the economy overall, Haldane said he was “probably a touch more optimistic” than a number of his colleagues on the BOE’s nine-member monetary policy committee.

Bailey was one of several rate setters to paint a somber picture of the economic outlook last week, saying risks remain to the downside.

The central bank has already slashed interest rates to a record-low 0.1% and unveiled a huge programme of bond purchases. Economists and investors largely expect more monetary stimulus later this year.

Along with the fiscal measures, such support has “contributed significantly” to the UK’s nascent recovery, Haldane said.

“Right now the prevailing narrative is a bit gloomier than I think is justified by the data,” he said. “I am, I hope, more open minded about what lies ahead both economically and policy-wise.”

Bloomberg