Javid plea to rule out post-virus austerity

Sajid Javid has urged the Government not to return to an age of austerity post-virus, insisting that spending cuts or tax increases are “self-defeating”. Writing in The Daily Telegraph today, the former Treasury chief warns that the crisis is likely to exacerbate the regional disparities, arguing that “levelling up” is critical. His warning comes after the publication of After The Virus by the Centre for Policy Studies, the first detailed blueprint for a post-covid economic recovery.

Lynton Crosby thinks he knows where this crisis is going. Interviewing him for my new podcast “The World Tomorrow”, I wasn’t surprised to hear that polling shows our Australian cousins are more inclined to think of this crisis as an economic emergency than a public health one. Not so in the UK. In one sense, we have Rishi Sunak to thank. His economic interventions are rightly among the most generous of any country, and have insulated many from the worst of the downturn – so far.

However, Lynton’s observation does give us a sense of where this crisis is heading. By late summer, it’s estimated that 2.5 million people could have lost their jobs. Worse still, it is becoming increasingly clear that “left-behind” areas are likely to be worst affected.

There is only one way out of this crisis. Growth. Yet among economists, hopes for a V-shaped recovery have faded. Bruised investor and consumer confidence as well as scarring effects from the deep recession may cause long-lasting damage to the economy. The longer lockdown continues, the worse this damage will be.

It is still firmly within the Government’s power to determine the speed and scale of our recovery. The question is how. The unprecedented nature of this challenge means that our recovery plan will require creativity and boldness. In that spirit, I put a team together at the Centre for Policy Studies to think about what such a plan might look like. Our purpose is to support the Government by generating ideas to help secure the strongest possible recovery, and the report sets out more than 60 recommendations, covering everything from taxation to monetary policy.

Although a comprehensive package, it is less a blueprint to be adopted wholesale than a series of measures that each stand on their own merit. Every section of the report is animated by a simple set of priorities: jobs, growth and business support. Of these, our priority should be the first. The quickest way for the Government to get people back into employment is by reducing the cost of hiring, which is why we have suggested a significant cut to Employer’s National Insurance.

There are a number of different ways the Treasury could do this. The Government could, for example, temporarily opt to align the threshold for Employer’s National Insurance with the £12,500 personal allowance for Income Tax, meaning that employers would save more than £500 for every full-time staff member.

A temporary VAT cut would be an effective way of getting people to spend again. The crisis is also an opportunity to build back greener, and major programmes on electric vehicles and replacing household boilers could create jobs at the same time as helping us towards net-zero emissions.

The Government must be especially careful not to pursue any tax increases that end up weakening the businesses that will drive our recovery. Trying to restore the public finances by clawing back money from Britain’s SMES would be self-defeating. We already have the highest tax burden in three decades.

One of my priorities in office was to lay the foundations for an infrastructure revolution designed to drive increases in productivity and long-term economic growth. With real interest rates below zero, the Government should not only bring forward these plans but go even further – by increasing investment in infrastructure, particularly in “leftbehind” regions. The “levelling up” agenda is now more urgent than ever.

One of the strangest aspects of the economic debate is the way so many in politics ignore the importance of monetary policy. To cement our focus on growth, we consider updating the Bank of England’s mandate to target nominal GDP growth rather than a narrow inflation target.

Finally, we put forward ideas for a new set of fiscal rules. First, the Government must get the economy moving again, and recover lost ground. However, it is critically important that we remain committed in the medium and long term to sound money, low borrowing and balanced budgets. That’s why we suggest that during this extraordinary period the Chancellor ensures the deficit falls year on year, and aims to balance the current budget within three years of GDP returning to pre-crisis levels.

While the challenge facing my colleagues in Government is immense, I am in no doubt that they possess the imagination and agility required to overcome it. With an unrelenting focus on growth and our hardest-hit areas, it is possible not only to rebuild our economy, but to set it on even firmer foundations than before.