Chancellor Rishi Sunak walked a tightrope with his latest plan to deal with the coronavirus crisis: aiming to slash government support for employment without crashing the economy.
The verdict of most economists on Thursday was that Mr Sunak had done enough in his winter plan to avoid a sharp economic downturn in the weeks ahead, but there was a good chance that in time he would be forced into more state support for companies and workers.
Ruth Gregory, economist at Capital Economics, said Mr Sunak’s measures — led by a new job support scheme to replace the furlough programme — would “go some way towards cushioning the blow” of new restrictions on economic activity to combat the resurgence of coronavirus.
But she still expected the deteriorating outlook for Covid-19 to cause the economy “to stagnate in the last three months of the year and take until end-2022 to return to its pre-crisis level [of gross domestic product]”.
Without saying it explicitly in his House of Commons statement, Mr Sunak’s core strategy was to impose his own economic version of the physicians’ hippocratic oath and do no harm over the winter.
Accordingly, the expiry of the furlough programme on October 31 will be followed immediately by the start of the job retention scheme, and looming demands by the Treasury for companies to pay £30bn of value added tax in March will now be deferred, and spread over 2021-22. There will be no sudden fiscal tightening.
Philip Shaw, economist at Investec, said this was a significant move. “The chancellor is sufficiently pragmatic to recognise that without continued fiscal support, the economy would have faced a possible cliff edge, [which] has now been smoothed,” he added.
But even though Mr Sunak greased his plan with additional taxpayer support, the main underlying message was one of tough love.
Under the new job support scheme — which is much less generous than the furlough programme — there will be no government funding for employment unless companies are prepared to pay at least 60 per cent of the labour costs.
The self employed will get only a fraction of the state support offered over the past six months. And companies hoping government-backed loans would be turned into grants were rebuffed. They just got extra time to repay.
Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said Mr Sunak was attempting a difficult balancing act.
Predicting many jobs would still be lost in the coming months, he said the chancellor was “trying to plot a difficult path between supporting viable jobs while not keeping people in jobs that will not be there once we emerge from the crisis”.
The Treasury did not issue new costings of its measures, but officials gave indicative figures for the generosity of Mr Sunak’s winter plan.
The job support scheme would cost about £300m each month for every 1m participants, they said, while the extension of the 5 per cent VAT rate for the beleaguered hospitality industry until the end of March would cost £835m.
Chris Sanger, head of tax policy at EY, said “each iteration [of state subsidy for jobs] delivers less support, with more being expected from employers”.
In total, the fiscal bill stemming from Mr Sunak’s latest plan was far smaller than either his emergency measures in the spring, which were led by the furlough scheme, or his summer statement, which also focused on saving jobs.
The measures the chancellor announced on Thursday are likely to add another £10bn to the deficit this financial year, a figure which is dwarfed by the nearly £200bn official estimate of direct costs of coronavirus so far.
The largest new cost came not in Mr Sunak’s Commons speech, but in government documents, which showed that since his summer statement the Treasury had approved another £24.3bn of expenditure, mostly on the NHS, vaccines and testing.
In total, the government’s extra expenditure has risen to £220bn in 2020-21, which is equivalent to the amount it normally spends in a year on education, defence, public order and economic affairs.
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The rise in government borrowing will be significantly higher than this, however, because weaker tax revenues and a higher bill for unemployment benefits will also raise the deficit by about £125bn, according to the Office for Budget Responsibility, the fiscal watchdog. Before the Covid-19 pandemic, the Treasury intended to borrow £54bn in 2020-21.
The total level of borrowing is set to be about £400bn for 2020-21, according to an estimate by the Financial Times. This amounts to more than 20 per cent of GDP, and would be the highest level of borrowing on record outside the second world war.
With borrowing at this level, there were no new measures by Mr Sunak to support training, or to ease the pain of redundancy through improved welfare benefits.
The days of the giveaway chancellor are therefore over, Mr Sunak was signalling, but economists were unsure that he would be able to stick to his more fiscally conservative approach.
Kallum Pickering, economist at Berenberg Bank, said the chancellor had to hope that the new restrictions on the opening hours of the hospitality sector and the guidance against workers going back to offices would serve to quell the virus.
If they failed, he predicted that in “a new lockdown, or a serious further tightening of restrictions, the chancellor may yet need to step up the emergency support”.
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