Chancellor gets it just about right

Rishi Sunak’s ‘Summer Economic Update’ was judged well – and delivered well – but it remains to be seen whether all the headline-grabbing measures will live up to the hype. The blizzard of announcements, culminating in the gimmicky ‘Eat Out to Help Out’ scheme, left me at least wondering whether the Chancellor was trying a little too hard to tick every box.

Importantly, though, the overall size of the package did feel sensible. Around £30 billion of additional spending and tax cuts would be a substantial ‘giveaway’ in normal times, but it is now just a modest top up to the £300 billion or so that the government is already likely to borrow this year. If it succeeds in strengthening the recovery, it could even pay for itself.

The Chancellor and his team also deserve credit for spreading the money around in ways that have a reasonable chance of having the most effect. In particular, he was right to resist calls for what would only have been a small across-the-board cut in VAT and instead target a larger reduction on the leisure and hospitality sector, where the additional support is needed most.

The temporary reduction of the burden of Stamp Duty – a tax that most economists hate – should also provide a helpful lift to activity in the housing market. In fact, the Chancellor should go further and extend this into a fundamental review of all taxes on property, with the aim of simplifying the system and allowing local authorities to keep a higher proportion of revenues raised in their area.

I am less convinced by the £2 billion Green Homes Grant scheme. If the potential savings on fuel bills are so large, why should homeowners not pay for the work themselves? It does at least make more sense to help poorer households who cannot afford the upfront costs, but several such schemes already exist.

However, the main focus today is on the support for jobs. The big surprise was the announcement of a one-off ‘Job Retention Bonus’ of £1,000, to be paid to firms for each furloughed employee who is still employed at the end of January. This could cost up to £9 billion, though this is dwarfed by the £60 billion price tag on the Job Retention Scheme itself.

This is a bit of a leap into the dark. A large proportion of employees will be brought back from furlough anyway, with or without this bonus. Indeed, many may already have returned to work. Nonetheless, the payments to firms will at least provide a boost to their revenues, even if not strictly necessary to protect jobs. In addition, the bonus could be a big difference at the margin for some employers, especially when deciding whether to bring back lower-paid workers.

The ‘Job Retention Bonus’ is potentially a bigger deal than the ‘kickstart’ scheme, which was expected to be the centrepiece of today’s statement. Under this scheme, the government (that is you and me) will pay the minimum wage for potentially hundreds of thousands of people aged 16-24 for six months. This would target support at the young and low paid who may find it most difficult to find a job.

This scheme is cheap – less than £2 billion – partly because it would only cover the minimum wage, and only for 25 hours per week. Take-up of similar schemes in the past has also been low. But this might be just as well. The ‘kickstart’ scheme could simply distort the market, ‘creating’ jobs for young people at the expense of the old – and those who are only slightly less young.

The Treasury says it will police the scheme to ensure that the jobs are truly ‘additional’, and of ‘good quality’, which will be easier said than done. I suspect the total of £1.6 billion for ‘scaling up’ employment support schemes, training and apprenticeships will be money rather better spent.

This just leaves one other surprise: the novel ‘Eat Out to Help Out’ scheme, which will provide a 50% discount for sit-down meals in cafes, restaurants and pubs from Monday to Wednesday during August. I really do not know what to make of this, and it will be interesting to see the responses from the industry itself.

At first sight, ‘Eat Out to Help Out’ seems an overly complicated way to deliver a boost to demand lasting only a few weeks. But it is at least market-led, in that consumers themselves will decide which businesses should benefit.

Overall, I think the Chancellor has got it about right. Crucially, economic activity is already rebounding as the official lockdown is lifted, and workers are gradually returning from furlough, with plenty of evidence that the initial recovery at least is ‘V’-shaped. There was no need to splash even more cash today, and the renewed commitment to winding down the Job Retention Scheme was especially welcome.

Of course, there are still good reasons to worry about the sustainability of this recovery, given the persistent concerns about jobs and about the coronavirus itself. But there will be another opportunity to provide more support, if necessary, in the Autumn Budget. As ‘holding operations’ go, today’s ‘Summer Economic Update’ filled the gap pretty well.

This piece was first published on 8th July by the Daily Telegraph (online)

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