On Wednesday, the chancellor will attempt to shore up Britain’s economic recovery from coronavirus as lockdown controls are lifted across most of England.
But Rishi Sunak is facing a delicate balancing act while severe risks to public health remain.
Although expectations that this will be a blockbuster summer statement are being downplayed, here are some of the policy changes the chancellor is thought to be considering for this week’s economic update.
Furlough scheme
The government is preparing to scale down the furlough scheme from the end of this month. Currently, the programme funds 80% of employees’ wages but it will end entirely in October after being trimmed from August onwards.
As many as 9.3 million jobs have been furloughed at 1.1 million companies, at a cost to the exchequer so far of £25.5bn.
Hospitality industry leaders have called for the government to extend support to the sector for longer, while Anneliese Dodds, Labour’s shadow chancellor, has demanded that Sunak ditch a “one-size-fits-all” wind-down of the scheme and provide targeted sectoral support.
The Resolution Foundation thinktank has suggested the chancellor use Wednesday’s address to turn the furlough scheme into a job creation programme, which would subsidise the wages of workers in the most heavily affected sectors – such as aviation – until at least the end of next year.
However, the Treasury is understood to dislike a sector-specific plan, as it would be difficult to administer and could be seen to favour some industries over others.
Tax cuts
Sunak has come under pressure to announce a cut in the rate of VAT from the current level of 20%, to help boost consumer spending and support households that have experienced reductions in incomes during the crisis.
Such a move would be straight out of the Treasury playbook for handling recessions. In 2008, an emergency VAT cut by the Labour chancellor of the time, Alistair Darling, drove up retail sales by about 1%, helping the economy recover from the financial crisis. Darling cut VAT from 17.5% to 15%, at a cost to government of £12.5bn.
Sunak’s predecessor, Sajid Javid, has said that the Treasury should be thinking about a three-percentage-point cut to 17%, which he said would cost about £21bn.
However, economists argue that the main barrier to people spending right now isn’t price. Some households have been able to save money while being confined at home during lockdown, meaning there is sufficient pent-up demand for spending in future. A bigger driver for a rebound in sales might be greater confidence in the diminishing health risks posed by Covid-19.
However, there is speculation that the chancellor could cut VAT for specific sectors, such as hospitality and leisure, that would help to cushion the blow from having to remain closed for longer.
Boris Johnson announced last week that the government would introduce an “opportunity guarantee” for young people, giving every young adult the chance of an apprenticeship or an in-work placement. Sunak will be expected to flesh out the bones of this promise on Wednesday.
It is likely that there will be an offer announced by the chancellor to subsidise workers’ wages at companies taking on new staff or preserving existing employment.
Business leaders are urging the chancellor to cut employers’ national insurance contributions (NICs). According to research from the Institute for Employment Studies, NICs are the single largest non-wage labour cost faced by employers. The IES says that the current system represents a tax of 13.8% on earnings above £8,788 a year, adding about £2,400 to the cost of employing someone on an average wage.
Sunak could raise the threshold at which employer NICs are made across the board. An alternative could be to tailor the measures to specific age groups – for instance by exempting those under 30 to boost employment opportunities for young adults.
Business rates
The chancellor could tweak the system of business rates, which brings in about £30bn for the Treasury each year, by levying taxes on companies based on the value of the buildings from which they operate.
Industry groups have called for the business-rate “holidays” granted to retail, leisure and hospitality firms during the coronavirus crisis to be extended to other companies.
Sweeping changes are unlikely to be made on Wednesday, before a promised “fundamental review” of business rates due in the autumn, meaning exemptions or grants for some companies are more likely at this stage.
The system has been repeatedly earmarked for reform, with calls for it to be replaced with an online sales tax, to account for the fact that e-commerce powerhouses such as Amazon have comparatively low business-rates bills because they operate from warehouses and not a chain of high-street sites.
Speaking about the forthcoming announcement, Dean Sadler, CEO and Founder at TribePad said: “The younger generation will bear the brunt of COVID-19. Kept out of the classroom for four months, their exam grades will now be based on averages instead of how they actually perform in exams. Their futures will largely depend on this and they will continue to miss out on vital life skills and learnings while out of the classroom.
With universities only offering online classes, many school leavers are putting off going to university for a year, so that when they do, they can get maximum value. And unfortunately, we will see fewer graduate schemes on the job market – businesses cannot afford to hire people to train up, so they will look to employ candidates who already have the skills they need. This creates the perfect storm for young people – competition will be high and they may get stuck in low-skilled, low-paying jobs .
There will be a lot of businesses that survive when they really shouldn’t. These so-called “zombie businesses” will not help the economy bounce back at all. Capital should be invested in those dynamic companies that can add real value to the economy and provide jobs for younger workers.
The government and private enterprise must look after the future of the workforce. Not providing support to young people in the coming months will do more harm than good in the long-run for the economy.”
