Britain’s public borrowing will rise to more than £350bn this financial year after Rishi Sunak gambled on borrowing vast sums to minimise the long-term economic damage wreaked by the coronavirus pandemic.
With the chancellor using his summer statement to outline a new package of job support worth up to £30bn, the deficit is likely to reach 18 per cent of national income, according to Financial Times calculations. This is almost twice the size of the deficit at its peak in the 2008-09 global financial crisis.
Mr Sunak said his speech to parliament marked the moment that the UK could move from protecting the economy to supporting and creating jobs as the Covid-19 lockdown was lifted.
His new package took the total cost of the Treasury’s economic support measures since March to about £189bn, but with tax revenues hit hard by the crisis, the deficit is likely to reach £361.5bn.
The chancellor sought to limit the rise in unemployment with a series of measures that either subsidised jobs or encouraged people to spend in the hardest-hit sectors of the economy.
The largest single item was a “job retention bonus” of £1,000 per worker paid to companies that bring staff out of the government’s furlough scheme. The plan could cost up to £9bn if all 9m people currently furloughed were re-employed before January.
The Treasury will also cut the value added tax (VAT) rate from 20 per cent to 5 per cent for the tourism and hospitality industry, including restaurants, pubs and cafés. The temporary cut will last for six months and cost about £4bn.
To help restaurants, Mr Sunak announced a novel plan for an “eat out to help out” discount of 50 per cent on meals and non-alcoholic drinks in cafés and restaurants during August. The meal discounts will only apply on Mondays, Tuesdays and Wednesdays and be limited to up to £10 per diner.
He also immediately raised the stamp duty threshold on all home purchases in England and Northern Ireland from £125,000 to £500,000 until the end of March next year to help kick-start the struggling housing market, at a cost of £3.8bn.
As billed before the statement, there will also be a £2bn “kick-starter” work creation scheme to stop the UK’s young people becoming part of a blighted “Covid generation”.
Paul Johnson, director of the Institute for Fiscal Studies, said it was “another big package from the chancellor” but added that the high cost demonstrated “how hard it is to target resources only where they are really needed”. Much of the job retention bonus, he said, would go to companies that would have rehired employees in any case.
Others worried that with support being withdrawn towards the end of the year, the economic recovery from April’s 25 per cent fall in output would be stopped dead in its tracks.
Mr Sunak insisted the government’s furlough scheme, which has supported 9m jobs since March, had to end.
“The truth is, calling for endless extensions to the furlough is just as irresponsible as it would have been in June to have ended the scheme overnight . . . Leaving the furlough scheme open forever gives people false hope,” he said.
“Although hardship lies ahead, no one will be left without hope,” Mr Sunak told the House of Commons.
While the chancellor’s statement was welcomed by business leaders, some were disappointed that the targeted help was confined to just hospitality and tourism, ignoring the damage being inflicted in sectors such as retailing and manufacturing. Others warned that the chancellor would need to revisit plans to offer a more broad-brush support for companies still struggling in the pandemic.
Business groups such as the CBI are seeking extensions to the existing bailout schemes, including the state-backed loans, business rates relief and grants, to help keep companies afloat and investing in their businesses as cash remains scarce and demand low in the gradual easing of the lockdown.
Carolyn Fairbairn, CBI director-general, said the job retention bonus would help companies protect jobs “but with nearly 70 per cent of firms running low on cash, and three in four reporting lack of demand, more immediate direct support for firms, from grants to further business rates relief, is still urgently needed”.
Mike Cherry, chairman of the Federation of Small Businesses, said the chancellor was absolutely “right to stress that the job of getting the economy back on its feet has only just begun”.
Labour echoed some business concerns that the plan did not go far enough and said that the job retention money should be better targeted.
“We were promised a ‘New Deal’, but what we got was a ‘Meal Deal’,” the party said, referring to the chancellor’s half-price meal offer. The Trades Union Congress said sectors such as aviation and manufacturing needed more support.
Mr Sunak acknowledged that his autumn Budget and spending review would be a bigger economic event as he attempts to rebuild the economy. “Our ‘plan for jobs’ will not be the last action — it is merely the next,” he said.
He insisted that the measures introduced would help to soften “the difficult moment” when the furlough scheme that has supported 9m jobs is withdrawn. “We will not be defined by this crisis but by our response to it,” he said.
Most Conservative MPs welcomed the package but Sajid Javid, former chancellor, hinted at a stirring of unease on Tory benches about the costs of the Covid-19 response.
He asked Mr Sunak to set out new fiscal rules in the autumn to put debt on a downward path by the end of the parliament. The chancellor said he wanted to put the public finances on a “sustainable footing in the medium term”.
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