Rishi must be bold and turbo-charge growth for recovery
WHO would want to be prime minister at the moment? As if dealing with a public health crisis of monumental proportions was not testing enough, rebuilding the economy after the devastation of the past few months will be the greatest peacetime challenge since 1945.
The Bank of England has warned that we face the worst recession for 300 years. Yesterday, a report by the Institute for Employment Studies predicted that the worst job losses will be in exindustrial towns in the north of England, much of Wales and the central part of Scotland. So areas that were already struggling before the crisis are being disproportionately hit even worse now. In them there are nearly 12 people unemployed for every person in a job, up from fewer than five in March.
It is no wonder that the Chancellor, Rishi Sunak – who has rightly won plaudits for his handling of the crisis so far – is said to be drawing up an emergency budget for next month.
The furlough scheme is already on course to cost over £80billion and the Office for Budget Responsibility predicts that this year’s budget deficit will be more than £300billion because of the cost of rescue schemes – plus, of course, the lost tax revenues.
ORDINARILY this level of deficit would itself cause economic panic – but even normally hawkish economists agree that we are in a new world where exceptional measures are required.
It is widely believed that the Treasury is working on plans to spend further sums on infrastructure projects and training schemes – and there is talk of a national investment fund to direct cash to tech companies.
According to one report, far from destroying the Government’s election promise to level up the economy in the so-called “Red Wall” constituencies in the North and Midlands, the new spending package will be the “manifesto on steroids”.
Last week Boris Johnson said he would use the crisis as “a springboard to double down on the ‘level-up’ agenda”.
Prior to the crisis, the Government was preparing to publish a “national infrastructure strategy”, expected to set out over £100billion of capital spending, including an expansion of broadband and transport. This was to have been the high point in its plans to make good on the manifesto promise. Now it will be merely the foundation of it. Because vital as these infrastructure measures are, they are only one aspect of what is needed to allow the economy to recover.
Some 99.9 per cent of British businesses are small and medium-sized enterprises (SMEs). They employ 60 per cent of all workers and are responsible for over half of all private sector economic activity. So it’s critical that they are supported – or, rather, given the opportunity to flourish. The Corporate Finance Network estimates that almost a fifth are teetering on the edge. This would be a disaster for the economy. So Mr Sunak needs to focus on these SMEs.
Those that do manage to pull through will be operating in a landscape of rent arrears, cashflow problems and consumers fearful of spending. The furlough scheme will end in October and the Chancellor has to find a way to give these businesses the best chance to revive.
THAT should mean, among a raft of measures, slashing corporation tax. Doubtless there will be those on the Left who object – but a dead business pays no tax at all. It is far more sensible to help businesses thrive to create employment, feed into the economy and boost government revenues.
We learned in the 1980s the counter-intuitive wisdom that tax cuts can actually boost government revenue as well as stimulating the economy. Baroness Thatcher reduced the basic rate of income tax from 33 per cent to 25 per cent, with the top rate reduced to 40 per cent from 83 per cent. Tax receipts nearly doubled as a result of economic stimulation.
We also need to make it far easier for start-ups. Yes, there is a risk involved, which is why banks are often reluctant to lend. But just as the Treasury has guaranteed loans during the pandemic, so we need to encourage banks to be far more open to such loans.
I’d be amazed if this isn’t more or less what we get from the Chancellor next month. He is well aware that his job now is to turbo-charge growth – to do everything he can to allow business to thrive and the economy to recover. The only hope of reducing the deficit is, paradoxically, to take measures which might make it even bigger in the short term – but which will spark the growth we need.
‘It’s critical small and medium businesses can flourish’