• Darling, said the covid-19 crisis is fmore serious than the global financial crisis of 2008-2009
  • Darling warned of a wave of unemployment that will arise once the furlough system is phased out
  • Darling and Hammond also recommended that Sunak should avoid a new round of austerity

Three former Chancellors of the Exchequer of the U.K. have warned that the covid-19 crisis may lead to severe unemployment in Britain.

The three ex-chancellors, Alistair Darling, George Osborne and Philip Hammond were asked various questions by Members of Parliament on the Treasury Select Committee on Wednesday about the impact of coronavirus on the U.K. economy and what can be done to mitigate the negative effects.

Darling, who served as chancellor in the Labour government from 2007-2010, said that the covid-19 crisis is far more serious than the global financial crisis of 2008-2009 he faced.

"The key difference between then and now is that from day one, the government wanted to get the economy going again, and therefore we introduced a range of measures, which enabled us to do that,” he said. "The situation today is different, in that firstly, it is part of government policy right across the world, and rightly so, to actually suppress economic activity through the lockdown and other measures... Unless and until the government gets control of the virus itself and the spread of the virus, it's difficult to see how you can pull out the stops and get the economy going again."

Osborne, who served as chancellor under Conservative Prime Minister David Cameron from 2010 to 2016, was more hopeful than Darling.

“If you look at the history of pandemics and plagues and the like in our society, then the economic bounce-back is going to be relatively rapid,” he asserted. "If you look at the history of banking crises throughout our history, not just the one 10 years ago, but in the 1920s and [1930s] and in the 19th century and before, recoveries are very slow and protracted and painful, because the credit channels of the economy are impaired, and despite all the work that Alistair did, and I did, to try and unclog those channels, it takes a long time for the allocation of capital to get to the efficiency it has before the banking crash."

Hammond, who was chancellor from 2016 to 2019 under Conservative Prime Minister Theresa May, said it was too early to determine which crisis is worst.

“A lot is going to depend on whether over the next [few] months it becomes clear that we are heading towards either a vaccine... and that the future trajectory is one of returning the economy to something like normal, or whether, by contrast, we are not heading towards an early development of a vaccine or a treatment, and we have to plan in terms of restarting the economy living with Covid," he said.

Darling declared that the U.K. government must initially deal with a wave of unemployment that will arise once the furlough system is phased out.

The state must also “make sure that people who are displaced from the workplace, who lose their jobs -- that we can get them back into work as quickly as possible. It will be necessary for the government to make sure that you don't end up with a recession becoming a depression."

Darling further warned: “We need to get ourselves into the frame of mind where we’re thinking about 1980s levels of unemployment.”

(The U.K. unemployment rate peaked at almost 12% in 1984 during the darkest days of Margaret Thatcher’s term in power.)

Osborne also suggested the current crisis may lead to massive unemployment. “There will be loads of people in businesses that have gone bust that aren’t going to return, and people who are coming off furloughs into unemployment. That is going to be a big social challenge, and of course economic challenge, for this government,” he said.

The Bank of England warned that the unemployment rate may more than double from the present figure of 3.9% by the end of the year.

Osborne believes that the main challenge will be for government to find a painless way to withdraw the funding schemes that have supported people and businesses.

“The furlough scheme has been absolutely essential... many people on furlough are going to go back to their jobs,” he said. "But we have to be honest and say that quite a lot of those businesses will not come back... and trapping people on a scheme that is generous to them in the short term, but actually prevents them from re-entering the labor force to get the new job they need, is potentially very damaging.”

(The current chancellor, Rishi Sunak, plans to withdraw the government’s furlough wage subsidy program starting in August.)

Osborne added: "I think the withdrawal of the furlough is going to be important for employment in the short term, and at the same time some of these loans to businesses that are never coming back are going to become an issue."

Thus far, the U.K. government has largely refused to bail out airlines struggling with vanished demand. Several have laid off thousands of workers and plan to streamline their operations.

"There's a whole separate issue about what you do with these large stakes we're going to take in large companies like airlines, potentially, and aerospace manufacturers,” Osborne noted. ""I can imagine an airline saying it wants to shut an uneconomic route to one of the further-flung parts of the UK... I think that's going to be more problematic than I think people have realized atthe moment."

Darling noted that both France and Germany have provided huge bailout loans to their ailing airlines.

“Our model here [in the U.K.] is slightly different, in that the idea of a flag-carrier isn't quite what it was, but I think most people would take the view that we've got to ensure that we've got a transport industry," he said.

The Chancellors then tackled the thorny issue of how Britain will end up dealing with the mountain of debt that will accrue from the stimulus measures.

"If you want stimulate the economy, the most obvious thing to do is a time-limited [value-added tax] reduction,” Darling said. "When we get to the happy day when we're recovering... yes, we are going [to] have very high debts, like we had at the end of the Second World War, but one of the things that a government like ours can do, you can actually carry that for some period. I would be very concerned if in the recovery phase you start clamping down on things prematurely, and you drive the country back into a recession."

Hammond sees no logic to raising taxes in the short-term.

“I think we all accept that the U.K. as a creditworthy, mature, larger economy can carry more debt in the context of the short-term crisis,” he said. “Of course, we have to remember that debt is cumulative by its nature. We increased debt very substantially during the course of dealing with the last crisis, and we'd only just got back to the point where we were starting to see debt very slightly decline as a share of [gross domestic product]. Now we're going to see it increase significantly again as a share of GDP, so eventually we have to think about how we manage the challenge of debt in the long term.”

Darling reiterated the government needs to be proactive throughout this crisis.

“Government needs to be planning. Let’s just assume things are going to be worse – it’s better that it’s good and well – but don’t leave it too late because it does take a long time to put these things in place,” he said.

Darling and Hammond also recommended that Sunak should avoid a new round of austerity to clamp down on the costs of rising government borrowing.

“In the recovery phase, the next two years… the debt as percentage of GDP [should not be] the primary concern we should be addressing,” Hammond commented.

But Osborne cautioned that the government will have to either enact cuts or increase taxes once the pandemic passes.

“Sadly we are poorer than we thought we were, and either we’re going to have to raise more in revenue or spend less than we were planning,” he warned.