Summer Statement reflections
In truth, the level of unemployment will depend upon how quickly we return to normal life which, in turn, will depend much more on progress in combating Covid-19 than any fiscal measures available to the Chancellor. Nonetheless, he had little choice but to take bold action to protect existing jobs and encourage the creation of new ones.
His statement contained some significant measures, and some interesting innovation. The measures to tackle unemployment included:
- a new “kickstart” employment scheme for 16-24 year olds whereby the Government will pay their wages for six months;
- a bonus of £1,000 per employee if employers bring staff back from furlough and employ them until January;
- a payment to businesses who take on apprentices or trainees;
- doubling the number of work coaches in the Department of Work and Pensions;
- increases in spending on public sector infrastructure/maintenance/insulation; and
- vouchers to make homes more energy efficient.
The Chancellor also announced an immediate and temporary cut in Stamp Duty Land Tax, raising the threshold to £500,000 in the hope that an active housing market will have a knock-on benefit for employment (builders and decorators etc).
One contentious issue was how much support specific sectors would receive. The ongoing restrictions, including social distancing requirements, have a greater impact on some sectors than others and some argue that the level of Government support should reflect this. For example, the Labour Party favour continuing the furloughing scheme in some sectors. The contrary argument is that it is counterproductive to try to preserve the distribution of jobs that existed pre-Covid when, in all likelihood, consumer preferences will be very different for some time to come. Resources, the argument goes, should be allowed to be reallocated to reflect changing consumer preferences.
The Chancellor’s position has been to support some sectors severely affected but not all. For example, aviation and the automotive did not receive specific support but a generous package of support for the arts was announced on Monday. The statement focused on the hospitality sector – a major employer, especially of younger people. A temporary cut in VAT in this sector from 20% to 5% (to take effect on 15 July and to last for six months) was well-trailed and is financially the most significant measure. Some have criticised this on the basis that lack of demand for pubs, restaurants etc. is driven not by cost but because people are worried about the health risks of going out or the perception that the experience of going out whilst social distancing will be unsatisfactory. However, it is quite possible that the cuts in VAT will not be passed on to consumers but enable businesses to remain viable with lower numbers of customers but with a greater mark-up per customer.
The second measure is the eye-catching “Eat Out to Help Out” whereby the Government will pay up to 50% of any hot meals eaten out on a Monday, Tuesday or Wednesday in August. This should provide a short-term boost to pubs and restaurants (and, indeed, the already popular Chancellor of the Exchequer) whilst also, perhaps, getting people used to going out again.
One advantage of the “Eat Out to Help Out” scheme, in contrast to the VAT cut, is that it is much more obviously time limited. The Treasury will be very nervous of a campaign to make the supposedly temporary VAT cuts for hospitality permanent. The recent row about the prospect of free car parking for healthcare workers coming to an end demonstrates how hard it can be to reverse short-term giveaways.
The Government appears to be content to live with a significant deterioration of the public finances in the short-term but will worry about ongoing borrowing once the crisis has passed. As the Chancellor commented in his statement “over the medium-term we must and we will put our public finances back on a sustainable footing”. How this will be done is a matter to be addressed in the Autumn Budget and Comprehensive Spending Review. We got little indication today as to how the Government will put the public finances on a sustainable footing other than a forthright attack by the Prime Minister on a wealth tax, which Labour have tentatively indicated they might consider. With pressures on public spending likely to grow, it is probable that we will see a combination of higher borrowing and higher taxes in the years ahead. But we will have to wait for a while for details.