Come the autumn, Sunak’s half measures must morph into radical wealth creation
Chancellor should prepare ground for deregulation of planning and cut red tape that holds back innovation
Rishi Sunak, the Chancellor, asks to be judged not by the crisis itself but by the Government’s response to it. As well he might, because what is so unique about the economic consequences of the Covid pandemic is that in large measure they are down to the Government’s own instruction; they are not the result of some random meteorite strike. Having closed large parts of the economy down, banned people from travelling and spending money, stopped them going to the pub or to the office, and instead urged them to work from home, the Government is struggling to find ways of persuading them back again.
As Paul Johnson, director of the Institute for Fiscal Studies, put it: “They’ve prevented us from going to the pub; now all of a sudden they are trying to bribe us to go.”
As screeching, handbrake turns go, this one is hard to beat. Yet there is one rather obvious problem; as
‘Until we are told it is safe to go back to work, much of Sunak’s package threatens to fall on stony ground’
‘Of all the measures, perhaps the most innovative was the new jobs retention bonus’
long as the social distancing measures are maintained, and as long as people continue to be told to work from home, you can bribe all you like, but still it will struggle to have the desired effect.
The Government’s attempts to “kick-start” the economy are therefore all a bit cart before horse.
Until we are told it is safe to go back to work, to gather in crowded places, to eat in popular restaurants where the tables are close together, unencumbered by plastic screens, until we can again sit cheek by jowl in the theatre, cinema and music venue, and until the kids are sent back to school, much of Sunak’s package threatens to fall on stony ground.
All that said, it’s hard to find any particular fault in this £30bn of initiatives. The devil of these things is always in the detail, but if we view the package as in effect one mighty temporary tax cut for the most affected sectors, then it plainly has some merit. Mercifully, the Government has so far largely resisted the temptation of massive, make-work, public sector job creation schemes.
We’ll forget the astonishing £49bn so far spent in additional support for public services, much of it on PPE and test, track and isolate systems, which is much bigger than initially budgeted for.
The strongest criticism that can be made of the new package is that it is not particularly large by international standards. The German stimulus, for instance, is more than four times as big, and that’s assuming take-up of the UK initiatives achieves the headline numbers, which it won’t. As an answer to the expiry of the £60bn furlough scheme, they are most unlikely to do the trick.
But let’s not be churlish. Of all the measures, perhaps the most innovative was the jobs retention bonus, potentially worth £9bn if all 9m workers currently on furlough were to be taken back on staff.
Obviously, it is not as generous as the furlough itself. Firms will have
‘Despite the innovations, it’s hard to make a difference with one arm tied behind your back’
to make some difficult judgments on how quickly business activity, and therefore staffing needs, might recover. But it is a potentially important incentive none the less, which offers a useful reduction to firms in labour costs.
The VAT cut might likewise be regarded as more of a tax break to firms than to consumers.
If the difference between the old 20pc rate, and the new, temporary 5pc rate is pocketed by the business rather than passed on by way of price reductions, it goes some way to compensating firms for the lower levels of footfall mandated by continued social distancing measures.
In effect, the firm gets a 15pc increase in takings without any additional cost to the customer.
The eat-out-to-help-out scheme is by contrast in effect a tax cut for consumers, rather than businesses, and could prove useful in persuading them back to the now almost forgotten habit of going to a restaurant, café or pub. I’ve no problem with the stamp duty land tax holiday, or the green homes grant, both of which ought to help support jobs, and generate new ones, in the home improvements sector. More housing transactions mean more work for kitchen fitters, decorators and furniture makers.
Yet for all these innovations, it’s hard to make a difference when you have one arm tied behind your back; the economy is struggling not because of the relative absence of government support, but because social distancing, both voluntary and obligatory, prevents it from operating properly.
There is no legislating for how people might behave once restrictions are removed – many will remain ultra-cautious for a long time to come regardless – but the economy stands no chance of fully recovering until they are.
Even so, I’d have gone further if in Sunak’s shoes. What’s he got to lose? “In the long run we are all dead,” observed the economist John Maynard Keynes. “Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again.”
At times like these, you need to look after the present, and trust that the future will take care of itself.
Already Sunak worries too much about the future, as in some respects he must. Eventually, all this will have to be paid for. If the Chancellor goes too far, he might frighten the horses and prompt a calamitous loss of market confidence in the UK economy.
But as long as the Government deems it necessary to keep the economy chained, he is duty bound to keep feeding it.
The “build back better”, third phase of the pandemic response is apparently saved for the autumn Budget, where I imagine, with the end of furlough pending, he will have to be a lot bolder than this package of half measures.
In particular, he needs to come forward with a quite radical programme of initiatives to encourage wealth creation, including root and branch deregulation of planning and the myriad other restrictions that hold back Britain’s pent-up entrepreneurial potential.
Like it or not, this has to begin with the biggest restriction of the lot – government-mandated social distancing.
The Chancellor delivering his summer economic update in the House of Commons