Subrahmaniam Krishnan-Harihara, Head of Research at Greater Manchester Chamber of Commerce, examines the contents of the Chancellor’s Summer Statement.
Earlier this afternoon, the Chancellor Rishi Sunak delivered his third major fiscal intervention speech of 2020. After having made the Budget announcement and the COVID-19 package in March, the Chancellor has been forced by the current economic climate to make more announcements to help the UK recover from the worst economic consequences of the pandemic. Anticipation for today’s fiscal announcement had been building for some days with some commentators calling it a “mini-budget”. The lead up has also been dotted with announcements of various schemes such as the £1.5 billion allocation for arts and culture and much smaller announcements for infrastructure improvements. Together, they form part of a major stimulus to stimulate demand and safeguard jobs in the UK.
Data gathered through the Chamber’s Quarterly Economic Survey and Business Monitor surveys show that the sudden reduction in customer demand has posed a liquidity challenge to many businesses and put jobs at risk. These findings have been reconfirmed by other surveys such as the British Chambers of Commerce’s COVID-19 tracker and explain why up to 11 million workers or 42% of the UK’s workforce had to be furloughed. Although the economy is opening up with some relaxation to lockdown and some employees have been brought out of furlough, a considerable number of businesses, especially those in the worst affected sector, do not see a clear way out of this crisis. Between March and May, there has been a significant reduction in employment prospects. Labour demand, measured using new vacancies published by the ONS, is roughly at half the level during the same period in 2019. The prospect of job losses is perhaps the single biggest risk as the Job Retention Scheme is wound down. Naturally, today’s intervention from the Chancellor focused heavily on preserving and creating jobs, the centre piece being the bonus for business to bring staff from furlough and the Kickstart Job Creation Scheme.
Labour market interventions
Contrary to demands from many commentators and industry bodies, the Chancellor has not offered further flexibility within the furlough scheme. Nor has he offered an extension of the scheme for specific sectors, wanting instead to incentivise companies for each worker they bring back from furlough. If the worker is paid at least £520 on average, in each month from November 2020 to January 2021, the company can claim a bonus of £1,000.
The Kickstart Scheme, a headline policy, is positioned as a response to the risk of youth unemployment. Aimed at 16 to 24-year olds, the scheme will pay up to 25 hours of wages at national minimum wage for a period of six months. The business can then top up the young person’s wages. In effect, this scheme provides low or zero labour to businesses. This is likely to be of attraction to many small businesses, who can take on young people and claim an initial wage subsidy. As the economy recovers and the business climate improves, the prospects for employment may go up. Since the scheme only applied to new jobs created, its application will be scrutinised to ensure that the scheme does generate net additional jobs. Moreover, businesses are likely to incur costs for training and preparing the new recruits, which could be a challenge during this crisis.
Concerns have been expressed about apprenticeship recruitment in the aftermath of the pandemic. To address this, the Chancellor has announced a £2,000 bonus for businesses to hire young apprentices and £1,500 for hiring apprentices aged 25 and over. The bonus can be claimed during the next six months.
Support for the hospitality sector
For the hospitality sector, the Chancellor made two important announcements:
· A temporary VAT cut for the food, hospitality and leisure sector from 20% to 5%. The lower rate comes into effect on 15 July and will run until 12 January.
· A meal discount scheme that will run in the month of August. Under the “Eat Out to Help Out” scheme, every individual eating out will get a 50% discount off meals up to a maximum of £10.
As the worst affected sector, making interventions for the hospitality sector are essential. Although these measures are aimed at stimulating demand, it is uncertain whether the price cut will drive people into pubs, restaurants and leisure attractions. Although there are early indications of some people venturing out since last weekend, the majority may need assurance of further improvements in the public health situation before they can confidently return to restaurants and pubs. These measures do address one significant concern for hospitality businesses – their ability to serve large numbers of customers is constrained by social distancing requirements. If people are encouraged to return in large numbers, it may be possible for venues to make adjustments such as longer operating hours to meet demand and retain their employees. Since both of the measures target supply costs, a valid question to raise is whether they will automatically result in lower prices for the customer. Distressed businesses within the hospitality sector may use the VAT cut to shore up their cash flow and margins rather than pass on the discount to customers.
The construction sector is one that employs huge numbers of people and the fiscal response in any recession is to stimulate demand within this sector. Increased activity in the sector helps create new jobs. In keeping with this, the Chancellor announced a fourfold increase in the stamp duty threshold from £125,00 to £500,000. This temporary measure takes immediate effect and will run until the rest of the year. There were clear indications of a slowdown in the housing market in April and May and the Chancellor has placed hope that the stamp duty cut will lead to an immediate pick up. Interest rates are at record lows, which means mortgages will be less expensive. Coupled with previous commitments to affordable housing and discounts for key workers, this measure could spur property transactions.
Another important scheme that will help the construction sector is the Green Homes Grant, a £2 billion scheme under which homeowners can get a voucher of up to £5,000 (£10,000 for lower income households) to make their homes more energy efficient. An additional £1 billion has been earmarked to make public sector buildings more energy efficient. Despite the ambition, owners of newer well insulated houses could many all benefit from this. In what appears to be a glaring omission, solar panels have been left out of the purview of the scheme.
The path ahead
All of the measures the Chancellor announced today fit in with the “jobs, jobs, jobs” mantra that the Government has adopted. As with any measure, there are some problems and downsides. These measures collectively will have a positive impact and offer assurance to businesses, but whether the actual impact matches the high expectations remains to be seen. The Chamber has always called for a stronger link between employment, training and skills development. There haven’t been any measures announced for older workers who may be left unemployed and still unsupported by the Kickstart Scheme, another omission that we want to see remedied.
At the beginning of the speech, the Chancellor made two significant points. First, he plans to complete a Budget and Spending Review in Autumn and the second, he wants public finances back on a sustainable footing in the medium term. UK public debt exceeded 100% of GDP in May for the first time in nearly 60 years as the Government was forced to borrow for coronavirus mitigation measures. Some difficult choices lie ahead for the Government and tax rises are possible. Whatever the measures adopted, Chamber members will not want the fragile uptick in the economy countermanded for the economic and social cost of a prolonged recession would be calamitous.