Everything hinges on restoring confidence
An old economic maxim holds that there is no such thing as a free lunch. But for a few days a week next month, there will be such a thing as a statesubsidised meal. To hear the Chancellor, Rishi Sunak, unveil his “eat out to help out” initiative was a startling recognition of the strange times we are living through.
Mr Sunak’s £10-a-head meal deal was an acknowledgement that getting confidence back into the economy is an absolute requirement if any of his other measures are to have any real effect. In this, his instincts are entirely right.
He wants bars, restaurants and other hospitality venues to be “bustling” once again, even while other parts of the Government continue to preach caution and an entire city remains in lockdown.
It is testament to the Chancellor’s deep concern at the levels of unemployment about to be experienced – greater than at any time since the early Eighties – that he pulled as many levers as he could find to prop up jobs.
The backdrop is sobering. In the space of 18 weeks, the economy has lost the same proportion of GDP – 25 per cent – that it had built up in the previous 18 years. Nine million people are on the state payroll. Millions of viable businesses are facing ruin because they have not been able to function for three months or more.
This has been especially true of those parts of the hospitality and tourism sectors that even now cannot return to normal because of social-distancing requirements. They employ more than two million people, most of whom have been furloughed.
Mr Sunak announced a targeted but temporary cut in VAT from 20 per cent to five per cent for these sectors until the end of the year, hoping this will help the profit margins of businesses that will only be allowed to operate at reduced capacity for the foreseeable future.
However, for as long as demand remains depressed by concern about the prospect of catching the virus, this seems unlikely to create enough custom. It makes little sense for the Government to insist that pubs, restaurants and hotels are safe while keeping beauty parlours or theatres closed. The conclusion that people will draw is that they are still risking Covid by going out.
Boris Johnson said during Prime Minister’s Questions that an opening plan for the rest of the economy will be published this week. It needs to be accompanied by an unambiguous declaration that all these settings are safe.
The main plank of the Chancellor’s plan was a job subsidy scheme of the sort seen during previous periods of high unemployment. So-called kick-start grants for young people aged 16-24 will directly pay the employer their wages for six months up to a maximum of £6,500.
Companies are being pressed to hire as many people as possible, and though they might take the view that their difficulties are not of their own making, the Government believes they have an obligation to do so. However, if the continuing pandemic restrictions make normal business hard to start up again, what are these employees being hired to do other than to keep them off the unemployment register?
Employers are also being encouraged to take back furloughed staff with a £1,000 bonus per worker, but the Government needs to acknowledge more openly that many of these jobs will have disappeared. To that end, Mr Sunak’s help for trainee schemes and apprenticeships is welcome, since these can teach new skills and lead to secure and permanent work.
The Chancellor is also providing an immediate boost to the housing market with a cut in stamp duty, but only until March 31. This should get buyers moving now to beat the deadline, but what happens when it is removed? Maybe the Chancellor will retain it in his Budget, as we hope he does. Other measures included a £2 billion investment in energy-efficient housing. This entire package should help to get the construction industry back on its feet.
The cost of these new measures, combined with those already announced since March, is colossal, and it is by no means clear how all of this will be paid for. Mr Sunak said he will address the implications for the public finances in the autumn, with some economists urging tax rises if he is to retain the country’s credibility with lenders. But tax revenues will remain far below what is needed for as long as the economy is running at reduced speed.
It needs to be operating at full tilt, and that will not happen while all the rules and regulations introduced to combat the pandemic, many of them arbitrary and inconsistent, stay in place. We will not get out of this mess until they are removed and consumer confidence is restored.
‘It makes little sense to insist pubs, restaurants and hotels are safe while keeping theatres closed’
‘The economy needs to be operating at full tilt, and that will not happen while all the rules stay in place’