Is the New Deal the Real Deal?

July 2020

Towards the end of last week the Prime Minister set out a “New Deal” for the country, an “ambitious economic strategy to rebuild Britain” and deliver on manifesto pledges to, you've guessed it, “level up” the entire country.

It's a clever piece of politics: invoking the image of Franklin D Roosevelt in 1933. He faced a collapsed financial system, broken markets, at least a third unemployed (though data from back then is patchy). What we do know is that there was no such thing as unemployment benefit. His famous address on the topic began with that timeless statement, “the only thing we have to fear is fear itself”.

Much as he has done with Churchill in the past, you can see why Boris now wants to invoke this other significant historical political figure.

But scratch the surface and what you see is that the New Deal isn't is particularly New. When you cut through the spin all this really seems to amount to is to bring forward £5 billion worth of capital investment projects that were already planned and already promised. This stuff was in the Tory’s manifesto last December.

Of course, what really is new since then is the damage unleased on the economy by the coronavirus (or by our politicians’ collective response to it). The centrepiece furlough provisions are estimated to have been used by 1.1 million different employers, and to have affected approximately 9.3 million jobs (out of an estimated 27 million private sector jobs). That’s a third of the private sector workforce (so I guess there is a Rooseveltian analogy there).

So far furlough has cost nearly £21 billion. And as we move into the next stage of the provisions, and start to see the trickle of bad news with furlough turning to redundancy, it is inevitable that we will project levels of borrowing that we have not seen since the Second World War. It looks like 2020 will see about a third of the private sector workforce subsidised by the taxpayer for half the year, with not a great deal of certainty as to whether those furlough payments are really unemployment benefits by another name. (as I type Pret has just announced it has culled 1,000 jobs).

On the Deal bit of the New Deal, I have seen a calculation suggesting that the actual Roosevelt New Deal, in today's money, would be a whopping $822 billion. Boris has got his headline for £5 billion. So, the real deal here is Dominic Cummings’ ability in getting this phrase in the headlines. And, yes, getting people like me to be writing pieces like this.

So if the new deal isn't new, and the deal bit isn't really much of deal in any meaningful sense, then write why write a piece about it now?

Because this marks a clear pivot from the previous decade of Government. The Prime Minister has rejected any kind of “austerity” solution to aid growth. We are not seeing any hints of major supply-side reform or tax cuts to kickstart things. What we have, and what we might expect more of, is “big state” intervention. This is positioning away from the market economy and towards Keynesian intervention. As John Maynard Keynes aptly said “when the facts change I change my mind”. Perhaps Boris thinks the facts have changed, that coronavirus means all bets are off. The market has failed.

My own view is more circumspect. We have seen in the past that projects, such as the Olympic Park, or Crossrail, have not provided the anticipated boom in the domestic economy. Those cases instead saw bosses desperately scrambling around to recruit skilled labour from overseas. And it’s questionable how significant the much vaunted “legacy impact” of projects like the Millennium Dome or the new Wembley have been. A shiny new classroom is lovely, but does it drive up standards of education? I am not sure.

Another layer on all this, of course, is what is happening in Hong Kong right now and the current, more aggressive, diplomacy of China. All of the big projects of late, the big “Hs” (HS2, Huawei, Hinkley Point…) have involved Chinese money at their heart.

I know Boris loves the digger photo op, but it is difficult to see how big state infrastructure will be a good, or even practicable, solution to the current situation.

The Chancellor will make a statement to the House on Wednesday 8 July. He will outline plans to support the economy and it is being labelled as his “summer economic update”. We will, as always, be on hand to provide (as near as damn it) real time analysis and assessment as to what it means for you.

 

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