Rishi Sunak’s coronavirus economic update: what to look out for, what’s missing — and what it all means
Boris Johnson and Rishi Sunak have vowed to get the economy back on its feet after months of lockdown.
After prime minister’s questions today, Rishi Sunak will rise to deliver an “economic update” to the Commons, following four months of lockdown and unprecedented Government spending to try and manage the Covid-19 crisis. Georgina Bailey sets the scene — and asks what the Chancellor might have up his sleeve
With the Bank of England projecting the economy shrinking by 14% this year, 9.3 million jobs furloughed, and some economists warning that unemployment could triple to over 4 million this year, the pressure is on for Rishi Sunak to deliver.
Specific challenges facing the the 40-year-old chancellor include whether to provide “microlevel” support for sectors that have been particularly hard hit by the Covid-19 crisis and are expected to be among the last to re-open fully, such as aviation, hospitality and tourism.
Related to this is tackling the projected high levels of youth unemployment, with a quarter of a million more people aged under 25 claiming unemployment benefits since March, and the economic and political pain of winding down of the Job Retention Scheme, currently scheduled to end completely in October.
As this is an “economic update” rather than a full budget, we will not be receiving detailed updates from the OBR on the state of the country’s finances, and the chancellor is also more constrained in what he can change in terms of taxation.
However, Sunak may appreciate the breathing space to fully assess the impact of lockdown easing on different areas of the economy and how the management of the pandemic is progressing before making more wholesale changes in the Autumn Budget.
And despite his own high public approval ratings, the chancellor is also under pressure from some on his own backbenches to return to what are perceived as the traditionally conservative ideals of less regulation to stimulate growth, rather than the Government’s high-spend so-called “New Deal” pledges.
Tory veteran MP Edward Leigh yesterday expressed the nervousness of some in the Commons: “Can we hear less from the chancellor and the prime minister less about high-spending lefties like President Roosevelt and more from good conservatives like Ronald Reagan or Margaret Thatcher? Less about subsidies and more about tax cuts and tax simplification.”
"Politically it might be hard, but you can see a case for the chancellor saying he’s going to come back in a month and reconsider" - Carl Emmerson, the Institute for Fiscal Studies
On top of this, the chancellor also has to try and tie his announcements to the long-term challenges facing the UK – decarbonisation and tackling the UK’s low productivity production. Philip Hammond, former chancellor, has therefore warned his successor to be prepared come back to the Commons as often as needed over the coming months to make new announcements.
Carl Emmerson, deputy director of the respected Institute for Fiscal Studies think tank, agrees that responsiveness will be key. He believes that the challenge for the chancellor now is judging whether shops and pubs are already at capacity due to social distancing, the extent to which consumer spending will bounce back as confidence in public health measures grow, and to what extent people just need more money in their pockets to spend.
“It’s possible that we don’t get very much. Politically it might be hard, but you can see a case for the chancellor saying he’s going to come back in a month and reconsider. I think staying nimble in this area is not a bad thing,” Emmerson says.
However, with some measures already trailed, and speculation whirling, here’s what you can expect from the chancellor this afternoon.
WHAT TO EXPECT
Firstly, there is very little chance of increases to income tax, VAT or National Insurance contributions.
Speaking to The Yorkshire Post on Monday, the prime minister confirmed that the “triple lock” in the 2019 Conservative manifesto still stands – for now at least.
Creating and supporting jobs
With recessions typically hitting young workers hardest, the chancellor will announce a £2bn ‘Kickstart Scheme’, where the Government will cover 100% of the National Minimum Wage for 25 hours a week for six-month work placements, with employers able to top this up. This will apply to young people aged 16-24 claiming Universal Credit and at risk of long-term unemployment, as part of the Government’s three point ‘plan for jobs’.
There will also be an £111m investment in traineeships for young people, with businesses receiving £1,000 per trainee they take on. The scheme will be available for businesses who are new to traineeships or expanding their current offering, in a move the Treasury says will triple the number of under-25s in training. This is part of the Government’s “opportunity guarantee” for young people, giving every young adult the chance of an apprenticeship or an in-work placement.
For those who are now out of work, the chancellor will invest £800m to increase the number of work coaches in job centres by 13,500, double the current number. Sunak is also expected to announce £32m for additional careers advisors, and £17m for work academies in England.
Up to 5,000 jobs will also be supported in green industries as part of a new £40m Green Jobs Challenge Fund. This fund will support environmental charities and local authorities to work on conservation projects.
Boosting spending power
Sunak will also unveil a carbon-friendly stimulus package, including £3 billion investment in green projects to “kickstart eco-friendly economic recovery” and create jobs in low carbon industries.
The Government will pay at least two-thirds of the cost of home improvements that save energy with homeowners able to receive vouchers of up to £5,000. Speaking to BBC Breakfast yesterday, business secretary Alok Sharma added that the poorest households could receive up to £10,000 towards costs.
The Treasury says the scheme, which launches in September and will last one year, could support to 100,000 jobs and save households up to £600 a year. £1bn will also go into retrofitting public buildings such as schools and hospitals.
Stamp duty for homes worth up to £500,000 will reportedly be axed for six months. Originally reported as being planned for the Autumn, any change would likely now be immediate to prevent the housing market from stalling over the summer.
This move has been heavily lobbied for by housebuilders, and would prop up prices for homeowners. However, as first home buyers are already exempt from stamp duty up to £300,000 (£450,000 in London), it would do little to benefit younger would-be home buyers, and those who have lost income.
Additionally, the Treasury is reportedly also considering a suggestion by the Resolution Foundation to introduce a ‘high street voucher scheme’, with every household being given vouchers worth £500 per adult and £250 per child to spend in hard-hit parts of the economy like high street retail and the hospitality sector.
James Smith, research director at the Resolution Foundation, says the £30bn scheme “would kickstart demand in the right parts of our economy, boost living standards and deliver targeted support to the businesses that need help the most”.
However, while the scheme would be more universal than a VAT cut, which would benefit those with higher incomes and more spending power, its success may be dependent on social distancing regulations and people’s perception of risk in visiting shops, pubs and restaurants in particular. It also would pose logistical challenges in delivery for the Treasury, and may not be ‘new money’ but rather replace money that people would have spent anyway.
WHAT OTHERS ARE ASKING FOR
Labour’s Anneliese Dodds and thinktank the Resolution Foundation are calling for a sector-specific Job Retention Scheme extension beyond October for industries which will take longer to return to ‘business as usual’, such as aviation, hospitality and tourism, and parts of the arts. They would also like to see local furlough schemes for areas which have to go back into stricter lockdown to manage local spikes.
However, the Treasury is said to be concerned about how these schemes could be accurately targeted, as well as the risk of maintaining jobs that won’t exist soon anyway. While supporting the notion of targeted furlough extensions if it’s operationally feasible, Carl Emmerson warns against “supporting people in jobs that are never going to come back”. “That’s where you want to think about a retraining scheme or helping people move to that new job,” he explains.
"A VAT cut would do little to allay worries over catching the virus" - Maria Busca, Dods Monitoring
Business lobby groups have called for cuts to employers’ national insurance contributions (NICs), which are the single largest non-wage labour cost faced by employers, according to the Institute for Employment Studies. Emmerson suggests that rather than a “blanket NICS cut”, one solution the chancellor may consider is targeting the cut to employees under 30, new hires or areas of potential expansion.
And while business rates are currently waived for many businesses, we should not expect major changes to the system before the “fundamental review” which is already promised for the Autumn.
Cuts to VAT
There has also been some speculation that VAT could be cut – either across the board or for specific sectors like hospitality and aviation. Sunak’s predecessor Sajid Javid has called for a reduction in VAT from 20% to 17%, at a cost of around £21bn.
After the 2008 financial crash, Alistair Darling announced an emergency VAT cut from 17.5% to 15%, boosting retail sales by 1% at a cost of £12.5bn to the Treasury. A major benefit of VAT cuts is how quickly they can be implemented.
However, there are disadvantages to VAT cuts too, with former chancellor Philip Hammond warning that “the history tells us that cutting VAT or cutting stamp duty can bring forward demand but it doesn’t overall increase the level of demand”.
Additionally, as Maria Busca, Dods political consultant specialising in financial services, explains, the Treasury does not yet know “if the subdued demand is predominantly due to the hit to many consumers’ pockets during this crisis or fears over the virus and social distancing measures”, so the effectiveness of such a measure in stimulating spend is unclear.
“A VAT cut would do little to allay worries over catching the virus,” says Busca.
Emmerson agrees that a clearer understanding of the blocks to spending is key: “If consumers think the environment is very uncertain, they’ll probably respond to price signals less.”