Rishi Sunak’s stimulus package may help save the Great British summer. Saving the economy will be a far harder task.

On Wednesday, the Chancellor of the Exchequer announced ₤30 billion ($37.5 billion) of tax cuts and extra spending to support the UK as it emerges from the coronavirus pandemic. Over the course of a 30-minute speech, he reduced taxes for home-buyers and the hospitality industry, and even offered Brits vouchers to cut the cost of eating out in August.

The measures are aimed at reviving confidence among consumers and industries still reeling from the lockdown after much of the UK economy re-opened on July 4.

The success of Sunak’s package, and any prime ministerial ambitions he harbours, rest on one big uncertainty: whether Boris Johnson’s government can prevent a second wave of the virus that causes a second lockdown. Another outbreak could prove devastating for an economy that already shrank 25 per cent in the two months to April.

“No amount of fiscal support can mask the fact that the UK recovery hinges almost solely on avoiding a return to repeated, widespread lockdowns,” said James Smith, a developed markets economist at ING.

Even if the virus doesn’t return, Sunak will have to confront the spectre of mass unemployment. Joblessness is expected to surge as he starts to unwind the unprecedented government programs that are funding the wages of more than 12 million workers. He may need to provide more stimulus when he presents his Budget in the fall.

More support?

“More support may well need to be announced in the autumn when we know more about the path of the virus and of the economy,” said Paul Johnson, Director of the Institute for Fiscal Studies. “The size of the package in part reflects how hard it is to target resources only where they are really needed.”

The state was already providing around ₤160 billion of direct support for the economy. That figure now rises to almost ₤190 billion, putting the Budget deficit on course to hit ₤350 billion in the current fiscal year, or a peacetime high of around 17 per cent of GDP, according to the Resolution Foundation think tank.

Pressed on how the extra stimulus will be paid for, Business Secretary Alok Sharma said on ITV’s Peston that now is the right time to borrow.

“The cost of inaction would be much greater than the cost of the action we’ve taken,” he said. “Borrowing rates are at a record low. There is demand for government paper. It is the right thing to do to support people now.”

That demand is being fuelled by the Bank of England buying vast amounts of government bonds in the secondary market under its quantitative easing program. Ten-year gilt yields are now less than 0.2 per cent compared with over 2 per cent five years ago. But the scale of the Budget deficit risks testing the equanimity of investors, with debt issuance in the first five months of the fiscal year already dwarfing the full-year record reached during the height of the financial crisis.

Sunak put preserving jobs front-and-centre of his speech, unveiling a ₤1,000 incentive for companies that retain previously furloughed workers until 2021, and funding for firms to hire young apprentices.

With signs that job losses are already mounting before employers take on more of the burden of paying furloughed workers next month, some economists were critical of Sunak for not doing more. Mike Bell, global market strategist at JPMorgan Chase & Co. asset management, said the main risk will be unwinding the furlough program before the recovery has taken hold, which could result in millions of jobs being axed.

Removing the furlough scheme before activity has recovered is like building three quarters of a bridge and not finishing it because it is becoming expensive, he said.

What our economists say

“Today’s statement looked very much like a stop-gap to us. Many of the policies are the usual responses during a recession (Sunak also reiterated Prime Minister Boris Johnson’s commitment to bring forward capital spending this year), but there wasn’t anything that was aimed at turbo-charging the recovery. Sunak is clearly watching how the economy responds as it reopens. If the recovery fails to build on its promising start, expect a more significant stimulus package in the fall,” said Dan Hanson and Niraj Shah.

Others also warned of holes in the plan, including a lack of clarity over what happens to firms in areas hit by localised lockdowns to contain specific flare-ups of the virus. Such restrictions have already been imposed in the east midlands city of Leicester.

Cliff edge

Businesses face cliff-edges in the autumn as existing support winds down, and so the government must consider reducing national insurance contributions and extending existing loan schemes, said Hannah Essex, co-executive director of the British Chambers of Commerce. “Many businesses are concerned about how they will survive in the event of a local lockdown, and we ask the government to urgently set out what support will be available if that happens.”

Rushanara Ali, a Labour lawmaker who sits on Parliament’s Treasury Committee, said that the measures aren’t fit for the scale of the looming crisis and called for more investment in infrastructure, training and social care.

“This feels like a holding position which is timid given that by October we’re going to have a cliff-edge situation when a sizable proportion of the nine million furloughed workers could face redundancy,” she said in an interview. “There could be a second wave of Covid-19, not to mention the Brexit uncertainty.”

Nonetheless, the Chancellor mounted a staunch defense of his decision to wean firms off emergency support. Continuing for too long, he argued, risks workers losing skills, and giving them false hope their jobs would still exist once the crisis passed.

Britain’s hospitality industry welcomed the cut in value-added tax and discount meals, saying they could buy time for businesses gasping to survive after being slammed by months of lockdown. Key to any longer-term recovery will be a sustained resurgence in demand in the coming months, which remains far from certain.

Out of the woods?

“This doesn’t mean we are out of the woods, and there are still significant challenges ahead,” said Kate Nicholls, Chief Executive of UK Hospitality. She highlighted the rent debts piling up from the lockdown as one major issue facing the industry.

James Reed, chairman of UK recruitment firm Reed, said Sunak could have done more to ease the burden on employers. He called for simpler employment laws and cuts to national insurance, and urged Sunak to make fresh stimulus announcements if circumstances require.

No one, he said, wants to see see jobs, jobs, jobs, turn into dole, dole, dole.

Buried in the Treasury document accompanying the statement were details of an extra ₤49 billion made available for public services since March, triple the latest estimate from the Office for Budget Responsibility. Of this, almost ₤32 billion is going to health services, including ₤15 billion for personal protective equipment for front-line staff and ₤10 billion for the government’s Test, Trace, Contain and Enable program.

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