LONDON (Reuters Breakingviews) - UK finance minister Rishi Sunak couldn’t ask for a better friend than Andrew Bailey. The Bank of England boss said on Thursday he would buy an extra 150 billion pounds of government bonds to help an economy that will take a new hit from the lockdown imposed in England this week. These purchases will allow Sunak to keep spending freely without worrying about whether borrowing costs might rise. But the central bank’s buying spree is at best a sticking plaster.
Britain’s public debt has ballooned to 2.1 trillion pounds, or 103.5% of its gross domestic product, as Sunak has extended emergency support to workers and businesses. A job furlough scheme alone has cost the government more than 40 billion pounds and that price tag will rise now that the state has extended the subsidy because of the new lockdown. Yet Bailey’s asset purchases have put a cap on UK government bond yields.
While Bailey is doing a good job of ensuring Sunak’s borrowing costs remain low, he can’t fix everything. The pandemic has led to changes in what people buy and how they work. For example, consumers spent more on furniture, electronics, and home improvements in the third quarter, and a lot less on travel, entertainment, hotels and fuel. If some of these shifts outlast the coronavirus, the shape of the UK economy will also change.
Britain may be better able to cope with such a structural shift than some countries. Even in normal times, about 9% of workers change jobs every year, the central bank reckons. The pandemic has, however, had an outsized impact on service sectors, such as hospitality, which employ low-skilled and young workers who may struggle to find jobs in other parts of the economy if the new jobs involve very different tasks.
There’s some good news: Even if patterns of consumer spending remain unchanged from the third quarter, Bank of England staff estimate the economic wrench would be far less extreme than in the 1980s and 1990s. That was a period of major structural change during which the share of employees working the UK manufacturing sector fell from 26% to 16%. The upheaval left some mired in long-term unemployment. The challenge is to avoid that happening again. No matter how much Bailey wants to help Sunak, only the state can tackle this problem.
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