Going Dutch with Rishi Sunak
Can the Chancellor really be all give and no take?
How pent-up is British demand? After four months in which large sections of the economy have been anesthetised – first by the government and then by consumer reticence to return to public places – the yearning to spend, spend, spend, ought to be as potent as the prime minister’s promise to “build, build, build.” Rather more so, in fact. For the background is stark. GDP has shrunk by a quarter, returning the UK economy to where it was in 2002. That is eighteen years’ growth wiped-out in the space of weeks. Either there is a rapid recovery of this lost ground or the public finances are ruined for a generation.
The rationale behind the furlough scheme was to ensure that companies coming out of cold-storage were ready to pick-up where they left off come the thaw with the staff they already retained. The alternative of forcing companies to sack staff (over 9 million of them, if the scheme really was all that kept them employed) or go to the wall risked the permanent contraction of business, particularly in the worst hit retail and hospitality sectors.
Last Saturday’s relaxation of pub and restaurant restrictions was supposed to demonstrate how much the English were gagging to return to normality. The media dubbed it “Super Saturday” in anticipation of scenes of eager drinkers’ body-surfing over heaving crowds to get to their first yard of larger. It was nothing of the sort. Far from a Roman orgy, it was more like tea at a Victorian seminary.
If this did not leave Rishi Sunak and his Treasury team worried that they had spent billions in vain, nothing will. As a snapshot of market confidence, the barometer needed a firm tap.
That flick of thumb and forefinger came today in what was formally a financial statement but was in reality the Chancellor’s mini-budget. Not a budget in terms of raising money, just a budget in terms of spending it.
As indicated by the objects of his affection, it is to get us spending in the consumer-orientated parts of the economy that the Chancellor is focussed. The headline stealing initiative was the state’s kind offer to pay half the bill for every meal ordered in a restaurant up to £10 per head on Mondays, Tuesdays and Wednesdays during August. Monday to Wednesday – because they are the quietest days; August because if pent-up demand is not tapped by then, we must conclude there is no pent-up demand to tap.
It is worth pausing for a moment to grasp the extraordinariness of this initiative. It used to be thought an amusing testament to Edward Heath’s timidity as prime minister that his privatisation programme only managed to liberate a chain of state-owned pubs in Carlisle. Yet, here we are with a Conservative government stumping-up half the bill for every trip to the Dog & Duck or Arbuckles and a generous 10 percent off (excluding wine) at Le Gavroche. Chancellor, you are spoiling us! Imagine if Jeremy Corbyn had proposed something similar at the last election? Boris Johnson would have had a field day. Coronavirus’s hallucinatory properties in expanding our capacity to except the incredible as essential know no bounds. What this “Eat Out to Help Out” scheme does signal is just how concerned the Treasury is that without an extraordinary push from the state, consumers have adjusted too readily to becoming savers.
Besides the “going Dutch” bill-sharing, the taxpayer is also picking-up the tab for the Job Retention Bonus, a £1,000 gift to employers for every currently furloughed employee they keep on until January. If it succeeds in ensuring that everyone currently furloughed is kept on into the new year, the cost to the Treasury will be up to £9.4 billion. This is another sign of how nervous the Treasury is that the scheme merely postponed hard decisions and that unless there is a further inducement, mass unemployment is looming in the autumn.
here we are with a Conservative government stumping-up half the bill for every trip to the Dog & Duck or Arbuckles and a generous 10 percent off (excluding wine) at Le Gavroche.
The evidence is clear about the life-time handicap to earning potential that a lengthy period of youth unemployment can cause those suffering it at the outset of their careers. Paying the wages and overheads of 18-24 year olds hired (so long as they work at least 25 hours a week) through the Kickstart Scheme is one response – at a cost of £2.1 billion) and paying employers to take on trainee apprentices (cost £1.6 billion) is another. The long-term value of traineeships that only exist because the state is incentivising their existence is contested, but – like the much criticised YOP and YTS in the 1980s – they are considered better than the alternative of jobless young people lacking purpose.
Enough of the gifts, what about the tax cuts? Business rates are already scrapped for retail, holiday and leisure businesses until March next year. Today’s financial statement reduced VAT from 20 percent to 5 percent for the hospitality, accommodation and attractions sector (cost £4.1 billion) which will be in place until January. Its intent is to safeguard 2.4 million jobs.
Will these VAT savings be passed on to the consumer in lower, more competitive offers, or pocketed by the employer? Betting on it being a buyers-market, the Treasury calculates it will be passed on to the consumer. This is a highly competitive, price sensitive, sector of the economy, so the expectation is not unreasonable.
Besides retail and hospitality, the Treasury’s other great concern is the property market where house prices have finally (after eight years) begun falling with the total number of sales transactions contracting by half in May. The increase in the stamp duty threshold (cost £3.8 billion) to commence at £500,000 until March next year is projected to ensure that 9 out of 10 home-buyers will pay no stamp duty at all. This is one tax liberation that Rishi Sunak will find himself under considerable pressure to renew in next year’s Budget given how regressive stamp duty has been in disincentivising sales and reducing labour mobility in consequence.
Since replacing Sajid Javid as Chancellor in February, Rishi Sunak has been all give and no take. Never mind the economics, the politics of his tenure have been extraordinary. How does Labour respond to a Conservative Chancellor who has expanded the state far more than the much-cited Franklin Delano Roosevelt ever did? All that the Shadow Chancellor, Anneliese Dodds, could do in her Commons reply was divert onto to the failures of the public health response from test, trace and track to inadequate data sharing with local councils – all very interesting but nothing to do with the financial statement – before tentatively seeking to suggest that the Kickstart scheme bore the hallmarks of a Labour scheme. Praise indeed, even if praise she did not offer.
But the real question is how will this latest prescription (combined cost up to £30 billion) be paid for if it does not work? – which is to say, if the economy does not rapidly respond to the Treasury’s antibiotics. On this subject, the Chancellor offered no hint today and it will be his autumn statement before we do get a first clue. By then, the Treasury will, at least, have an inkling of how the patient is responding to the medicine. But what if the recovery is tentative, rather than energetic? By 2024-5, the UK’s accumulated government debt will be heading towards £3 trillion. That is ten times larger than it was when Tony Blair and Gordon Brown inherited it in 1997. Today Rishi Sunak proved that there is such a thing as a half-price lunch. But the free lunch is still on us.
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