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Frontline stories: designing furlough at HM Treasury

In the spring of 2021, Richard Davies talked to Clare Lombardelli, Chief Economic Adviser at HM Treasury and Joint Head of the Government Economic Service.

RD: The past 18 months have been so extraordinary, I think we need to start with a benchmark: how does the pandemic compare to the 2008 crash?

In some ways it has been similar, in some ways very different. During both there was a sense of the utmost urgency since it was clear that many jobs and businesses were at risk. And in both there was a sense that you can’t fully understand what is really going on in the economy, since the crisis is developing in real time. This sense of rapidly evolving situations made for huge uncertainty in both cases.

The differences are greater though, I think. The first is that this was not primarily an economic crisis. It was a public health crisis in which the government had to take decisions that they knew would harm the economy. Second, to use some economics jargon, this was a ‘real economy’ crisis rather than one deep in the financial sector like the 2008 crash. That is, it was going to affect people’s jobs and businesses in every sector, in a direct way, and immediately.

Finally, the experience within HM Treasury and Whitehall was different: 2008 mainly involved those working on finance – with people quickly drafted in to boost those teams – the pandemic involved every team in HMT covering every sector of the economy. Everyone was working on Covid-19, and it was affecting everyone’s personal lives at the same time too.

RD: Did these differences alter the way you advised ministers on the policy response?

Yes – the tools were very different. In typical recessions the role of policy is normally to stimulate activity. But in this case, we needed to stop face-to-face interaction, to stop people travelling to work. So the regular playbook – policies that boost activity – was not one we could use and a new approach was needed.

RD: Back in 2007 there is a particular day in August I think everyone working at HM Treasury and the Bank of England probably remembers, when it became clear Northern Rock was going to fail and we were really in a full crisis. Can you remember a specific day this time?

Again, it was not quite the same: there wasn’t a specific day or event because of the way the pandemic was building. The government presented a Budget (on 11 March 2020) and this included a large package of support measures. Later it became clear that the pandemic was on an accelerating path and that things would have to be done that had never been considered before – to impose a lockdown on the economy.

At that point things changed – the Chancellor decided to introduce measures – take the furlough scheme as an example here – that were different to anything that had been done before. Because this crisis was different to anything that had come before.

RD: So you faced a massive crisis, and in policy terms were in completely uncharted waters. What guided the early thinking on how to respond?

The overarching economic concern was always employment and jobs. The government was conscious of the need to minimise the long-term impacts of the immediate crisis, preserving jobs and businesses where possible. The Treasury as a department has a sense of economic history and the long-term economic and social costs of unemployment and economic inactivity. The UK experience of the 1980s was important here.

And, in economic terms, if you think this crisis is temporary rather than some structural shift the economy needs to go through, the objective is to protect the matches between workers and jobs, firms and capital. In economic terms, the government sought to minimise the risk of hysteresis (job-market ‘scarring’).

RD: So history and labour market economics are useful guides – they tell you to protect jobs – but the sheet of paper is still pretty blank, how does the government actually go about designing the furlough scheme?

The Chancellor’s diagnosis was clear: the challenge was an enforced reduction of economic activity – the fact that we were putting everything into hibernation. It was about going back to first principles. Policy needed to protect the economy, keep worker-firm matches in place, and provide certainty. We didn’t run lots of forecasts, since the level of uncertainty was so high, and forecasts take time to produce.

Looking overseas can help. The government had never done this before, but policies we could learn from existed elsewhere. Germany, for example, has a scheme that supports firms and workers by topping up wages. (The Kurzarbeit scheme replenishes the wages for those who are put onto short-time by firms that cannot employ them full-time).

Of course, the pandemic was different – some firms’ demand was going to disappear completely for a time – but those types of policies did offer some guidance. Still, it was a huge policy experiment.

RD: How does training as an economist help? Were there particular papers or research that were important?

Economics really did help, because the best way to understand what was going on was to think quite fundamentally about the economy. To ask what the economy is made up of – consumers, firms, government – and to think about the effects on each of those groups.

Another set of questions was about behaviour: how would firms and consumers respond to the lockdown, and how might that vary by sector?

Economics helps with data too. We quickly amassed a huge amount of information – micro data, macro data – and surveys, which were helpful. Given the urgency, we used fast-access data in ways we had not done before – things like credit card spending and Google mobility data to try to understand what was going on. An economic framework helped us make sense of this.

RD: So it was not a particular paper or area of research that helped, but an economic mindset: the fact that sitting round the table you have people – including the Chancellor – who are trained in the basic building blocks of economics, so that you can ask the right questions?

Exactly that. The thing that economics really helps with is giving you a way to distinguish what is important from what is not. In a situation like this there is a huge amount of noise. You need to look at the size of the sectors, the numbers of people affected when considering each policy – this tells which things you should target because they are first order. Of course, there are lots of difficult boundary cases, but you need some way to prioritise, and an economic framework helps here.

RD: OK, so you’ve now got your policy – let’s take furlough – written down on paper, how do you make it happen in the real world?

Delivery of the furlough scheme was testament to joint working and HMRC who delivered it. This was a new payment that would have to go to hundreds of thousands of firms. So once the policy is designed in detail you still face big questions over how to implement it. How are we going to determine the payments and how will they be delivered and when?

You face two constraints. You are trying to design something that is going to be effective, but you also need to design something that can be delivered in the time that you have got. The delivery issues affect the design and the design affects the delivery.

RD: This is a vital insight, so let’s clarify. In government the challenge is not just about picking the best policy – be it tax or spend or furlough – but how you then make it happen.

Yes and in this case it meant many people working outside the boundaries of their normal jobs. In the end, Whitehall had a fantastic join up all the way from economic theory and behavioural science to employers, payments experts, and IT specialists to oversee the system. Government economists need to be able to talk to and work with all these people.

RD: Has Covid changed the UK’s economic challenges or do old questions remain?

The crisis has exposed things that were already there in the economy, rather than fundamentally changing them. To take one example, think of the priority to ‘level up’ – making sure prosperity and opportunity are more evenly distributed across the entire country. This was important before the pandemic but has become more important as we rebuild because Covid exposed differences across the country.

Other longstanding challenges for the UK economy remain – getting industrial strategy right, the productivity puzzle, the role of infrastructure, the role of science, and of course, climate and sustainability.

The reason to be excited as an economist is that there is lots of emerging evidence in these areas, making them areas where analysis and research can be incredibly powerful. We are always looking for and using new evidence to find the best way to make policy effective.

RD: And what about the way the Treasury works – will your new approach to real-time data, for example, be something that new recruits joining the department can expect to get involved in?

Well, new hires to HM Treasury and other departments can expect to use data more, simply because our ability to access and process data is increasing all the time. When it comes to data it is great to have a lot but the skill is in working out what is useful and what it tells you.

The new real-time spending data are useful and some of that we will continue to use. But the gold standard for data does remain the national statistics. Yes, they can take longer to produce, but this is because the Office for National Statistics (ONS) uses a wider range of sources and does so much quality assurance. GDP remains the best measure of the overall economy, even though we supplement it with other data.

RD: Finally, stepping back, this has been a period where HM Treasury was forced to come up with large and innovative policies. Are there lessons for more normal times?

This was a moment for bold and radical policy. But when you think about it, policy is quietly radical all the time. The scale of the Covid policies has been huge but measuring the importance of a policy should not be just about scale but also effectiveness. Whatever the area there is radical and exciting policy happening all the time – it is always important to build in creativity.

RD: So either on the grand scale – an economy-wide bailout – or something industry specific, policy is powerful, it changes the way the economy works…

And that is why economics is exciting and important – it is why public policy matters. It is fascinating work, and the opportunity to play a part by providing advice on these issues is a privilege.

Photo by claudiodivizia for iStock
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