The new wave

The economic policy response to Omicron

A new wave of this pandemic is underway, even if we can’t see much sign of it yet in the UK-wide data. The Prime Minister rightly tells us to expect “a tidal wave of Omicron coming” and in London it’s already arrived. This is not the Christmas present any of us wanted.

In terms of the economic impact, the speed of what is happening, and lack of concrete data, means that the debate about how much damage will be done and what support the Government should provide is currently in a phoney war phase: industry bodies and unions want a full, economy-wide, return of furlough; the Treasury insists ‘Plan B’ working from home restrictions are so minor that no action is required. We should be confident that neither is likely to be the right response in the weeks ahead, despite the very real uncertainty on the severity of health effects of this variant.

Further restrictions are likely to be required, but even if the Government chooses not to introduce them, renewed but targeted economic support should be introduced swiftly given the impact much higher case rates than we have seen before will have. 

Nature of the wave: size and severity

The significant uncertainty about the severity of this wave (in terms of hospitalisations) is only matched by certainty that a high case rate is going to be its dominant feature. With Omicron cases doubling every 2 to 3 days we are set for case rates many multiples of the 60,000 a day peak seen during last Christmas’ wave (we’re already above the July peak that drove pingdemic headlines). Christmas 2021 looks set to be marked by hundreds of thousands of cases a day.
What that translates to in terms of hospitalisations is far less clear thanks to uncertainty about Omicron’s intrinsic severity compared with the Delta variant, and its interaction with both our existing level of protection from vaccinations and the speeding up of the booster programme.

There is lots of complex modelling being done by epidemiologists right now – much of it heroic given we may well not have the data we need on this until it’s too late. But below we set out a (very) rough and ready illustration of what the transmissibility of Omicron means for the very real choices the Government is making this week on whether significantly more stringent restrictions are now required.

There is lots of focus on the fact that Omicron should see a lower admission rate than we saw at the start of previous waves thanks to vaccinations plus past infections. But what matters is whether or not it leads to fewer hospital admissions per infection than was the case with Delta given that higher level of protection. We have averaged 40,000 UK wide cases a day since September, which has translated into an average of 900 admissions a day.[1] If the ratio of admissions to cases stays even remotely like this 2 per cent (with Delta circulating amongst a largely vaccinated population) we urgently need more lockdown measures. Any increase in cases over 160,000 a day would result in hospital admissions exceeding last January’s peak of 4,000 a day that triggered a lockdown. And it is very likely that we will exceed that case rate. This is broadly the scenario painted by The London School of Hygiene & Tropical Medicine.

If we get lucky and the severity of this virus is significantly below that of Delta over recent months, then more optimistic (but still far from good) scenarios will come to pass. That could happen, for example, if vaccines or prior infection offer little protection against Omicron infection, but still provide the same protection against severe disease. In that world we get a very high case rate but a much slower surge in admissions, a scenario which early data from South Africa offers some support for.[2]

Where does this leave us? The Government needs to take a decision on further lockdowns in the absence of full information about what lies ahead. This is an exercise in balancing risks, which point to introducing more restrictions now to reduce the chance that unmanageable pressure on the NHS emerges, leading to thousands of deaths and requiring bigger and longer-lasting restrictions.

That doesn’t mean ignoring evidence that fewer cases will result in hospital admissions. It just means that, given the certainty of very high case rates, you have to be very confident that the fall in severity is really quite large to think there is an alternative. For example, a 25 per cent reduction in hospitalisation risk still sees 3,000 cases admitted a day if we hit 200,000 infections. But reasonable people can disagree and argue that we should wait to see more data. And history says the Prime Minister will at least be tempted by the idea that things will come good and that we can cope with a short period of high, but not catastrophic, hospital admissions.

Luckily for those of us focused on economic policy, we can leave the huge epidemiological uncertainty to the experts. Our job in many ways is far easier, because there is more certainty about both the economic damage that this wave will cause and what the right policy response should be.

Economic impacts

That’s because whether or not we see more restrictions introduced in the next few days, we know sectors involving face-to-face contact are about to be hammered. And that pain will be to both their demand and ability to supply.

If restrictions are introduced they will involve limitations or closures for large events alongside the hospitality and leisure sectors. But, even if they are not, the defining feature of this wave is a huge case load which will on its own drive major economic harm for those same sectors. It was always wrong to simplistically assume that restrictions drive economic pain, given plenty of evidence that behavioural change happens in response to rising case rates, but that will be turbocharged this time.

This is already underway. Christmas parties are being cancelled despite government explicitly encouraging them and diner numbers in restaurants are already down around a tenth. Everyone knows people reducing social interactions in order to ‘protect Christmas’ but they are likely to continue doing so while cases remain high. No-one wants 10 days locked up at home, not least because there’s no box sets left to binge two years into a pandemic. But that means revenues plummeting for restaurants, bars, gyms and the rest.

Those same kinds of firms will also face extreme disruption on the supply side because low earners in them will once again be the most at risk of infection. While the existence of lateral flow tests can help reduce the effects of a pingdemic, the sheer scale of the wave means isolation by those infected will have a material economic impact. With 20 million or more of us expected to be infected during this wave, the peak is likely to see well over a million people isolating at times. This reduction in the workforce will have real implications for keeping any hospitality venues left open staffed. Hospitals and schools may struggle to operate – with the latter leading to a further reduction in labour supply as parents cope with any return to online learning. The transmissibility of the virus and weak enforcement of health and safety rules also mean we can expect concentrated outbreaks in particular employers, forcing closures in practice.

So, hospitality and leisure may, or may not, be told by the Government to close. But, either way, firms will lose customers and employees will lose their jobs. And, as shown in Figure 1, employees laid off will receive far less help now than they would have done in previous waves with the furlough scheme unavailable and out-of-work benefits less generous following the removal of the £20 a week uplift to Universal Credit (UC). A single earner on £15,000 who loses their job will see their income fall to 30 per cent of what they are used to, compared to 40 per cent if they’d lost their job in an earlier wave or over 80 per cent if they’d be furloughed.

Huge income falls for those unlucky enough to work in hard-hit sectors is what we are on course for without further action. That combines with high and rising inflation as this winter’s cost-of-living crunch bites, and the fact that inadequate sick pay means many low earners will see income falls when forced to isolate.

Figure 1: Out-of-work benefits are less generous than in earlier waves


In yesterday’s Times, Treasury officials acknowledged that “If we do get to a position where we are telling businesses that they have to shut their doors then it is not unreasonable for them to expect additional government support.” But while there’s a more blinding obvious moral case for supporting businesses formally told to close, this position makes little sense. If we know certain sectors are about to see major economic pain as a result of the high case load from this new wave, then the answer is to support them irrespective of whether that damage results from formal restrictions or behavioural change. Indeed, if anything, economic support may need to be more widely available rather than targeted if the need for it comes from hugely widespread cases rather than sector-specific restrictions.

The top priority is to support household living standards through a difficult winter. Targeted furlough, available to firms hard hit by the latest wave, is the best way to achieve that objective whether or not new restrictions are imminently imposed. We have an existing scheme (the Coronavirus Job Retention Scheme) that can easily be brought back into use quickly. Claims that sectoral targeting is hard are overdone: that is exactly what we did with targeted grants through 2021. And targeting can be done via threshold tests rather than sectoral definitions, such as the premises being closed or VAT returns showing at least a 50 per cent fall in revenue (Austria has extended its furlough scheme until March 2022 with similar tests for access).  A higher basic rate of UC would clearly be desirable, but there is little prospect of the Chancellor considering it having so recently cut it and spent some of the savings on more generous entitlements for those in work.

Some will argue that the labour market today is clearly very different to what we saw in previous lockdowns, with much higher levels of vacancies, so furlough is unnecessary. But vacancies in the hard-hit sectors are about to temporarily disappear and workers moving between sectors has not been a major feature of this crisis: even in the recent reopening phase the share of job-to-job moves involving switching industries fell to its lowest level since at least the early 2000s. Widespread vacancies are, however, an argument against making full furlough available to all firms, as is the fact that the wider economy has shown itself more resilient to face-to-face contact being reduced.

Such a move comes with cost implications. We saw around 1.5 million hospitality and leisure workers furloughed in the early 2021 lockdown (Figure 2). If repeated, and with those furloughed continuing to receive 80 per cent of previous earnings, that would imply a cost of around £1.4 billion a month against a backdrop £46 billion of furlough spending to date. That cost could be reduced with a lower cap on pay-outs or maintaining some level of employer contributions.

Figure 2: 1.5 million hospitality and leisure workers were furloughed early in 2021

But the main reason for optimism around the cost of such a move (and indeed of any negative work incentive effects it might have) is the flip side of very high case rates that are coming: this should be a much shorter wave, at least in its acute form. The speed of the booster programme provides further confidence on this point. Making furlough available for January and February next year may be enough. Indeed, the short duration of the wave, and fact that we know what the exit strategy ultimately will be, provide in some ways a stronger case for furlough than during previous waves.
An additional benefit of implementing a targeted furlough scheme is that it would allow long-overdue changes to how we support those who are asked to self-isolate, reinforcing measures to control the spread of the disease. Any firm should be allowed to apply for grants to fully cover the lost wages, up to a cap, of those isolating.

It may also be necessary to consider targeted grants for firms given the wider costs they face, repeating the approach used earlier in 2021. There is some evidence that while cash flow has improved in the hospitality sector since the previous lockdown, such firms remain more vulnerable than early in the pandemic having depleted their cash reserves (Figure 3). In contrast, there are few signs of acute cashflow problems in the retail sector, reflecting strong demand for goods.

Figure 3: A higher proportion hospitality firms report depleted cash reserves than early in the pandemic


A major Omicron wave is now underway: case rates will surge far higher than anything seen to date. There is significant uncertainty about what level of pressure on hospitals that will lead to, but further restrictions will likely be needed. Even if the Government decides to try to tough out this wave without more legal restrictions, the impact of customers staying away and workers quarantining will mean significant economic pain for sectors involving face-to-face contact, such as hospitality and leisure. The heated debate in the House of Commons about requiring Covid passes for theatres may look very out-of-date in the days ahead as they close entirely, irrespective of whether the size of the Government’s rebellion yesterday also points to the difficulties of bringing in more restrictions.

Whatever the imminent cause of that economic pain, the right policy answer is to provide targeted economic support. Reviving a more limited version of the furlough scheme is the easiest way to do that and protect household living standards. Going into another Christmas with a wave of the pandemic beginning isn’t what anyone wanted, and nor is more spending on economic support than the Treasury had in mind. But those worst affected by this wave are no less deserving than those hit by previous waves. And, unlike then, we know that boosters offer us a way out of this mess in the months ahead. The past two years have taught us that economic policy can make a huge difference, it’s time it did so once again.


[1] Note the ratio of actual cases to admissions is much lower given we only detect around half the caseload.
[2] The support is in the form of hospital admissions growing more slowing than case rates, but emerging evidence still points to reduced effectiveness in vaccines reducing admissions. The speeding up of the booster roll-out is also clearly crucial but note those at most risk of hospitalisation have already been boosted.