How Chancellor May Boost UK Economy Emerging From Lockdown

How Chancellor May Boost UK Economy Emerging From Lockdown
As lockdown restrictions are relaxed across most of England, the chancellor on Wednesday will aim to boost the UK’s economy as it emerges from coronavirus.

Yet while severe risks to public health remain, Rishi Sunak faces a delicate balancing act. Despite expectations that this will be a ground-breaking summer statement, these are some of the policy changes the chancellor is believed to be considering in this week’s update of the economy.

Winding down the furlough scheme

The Government is preparing to wind down the furlough scheme from the end of this month. As things stand, the programme funds 80pc of employees’ wages but it will end finally in October having been reduced from August onwards. At a cost to the exchequer so far of £25.5bn, around 9.3 million jobs have been furloughed in 1.1 million companies.

Whereas Anneliese Dodds, Labour’s shadow chancellor, has demanded that Sunak abandon a ‘one-size-fits-all’ reduction of the scheme and instead provide targeted sectoral support, hospitality industry leaders have called on the Government to extend support to the sector for longer.

The Resolution Foundation think tank has gone as far as suggesting the chancellor use Wednesday’s statement to transform the furlough scheme into a job creation programme which would subsidise the wages of workers in the hardest hit sectors, such as aviation, until at least the end of next year.

However, the Treasury is said to be averse to a sector-specific plan which would be difficult to administer and could be seen to benefit some industries over others.

Possibility of tax cuts to stimulate economy

In order to help encourage consumer spending and support households that have experienced a drop in income during the pandemic, Mr Sunak has been urged to announce a cut in the rate of VAT from the current level of 20pc.

A move such as this would be a textbook Treasury response to managing recessions. In 2008, then Labour chancellor, Alistair Darling, stimulated retail sales by around 1pc and helped the economy recover from the financial crisis by implementing an emergency cut in VAT from 17.5pc to 15pc, at a cost to government of £12.5bn.

Mr Sunak’s predecessor, Sajid Javid, has said the Treasury should be considering a three-percentage-point cut to 17pc, which he believes would cost around £21bn.

Nonetheless, economists argue that the main obstacle to people spending at the moment isn’t price. There is sufficient pent-up demand for spending in future as some households have been able to save money while being confined at home during lockdown.

Accordingly, greater confidence in the decreasing health risks posed by Covid-19 may prove to be more of a driver for a bounce-back in sales.

Although there is speculation that a cut in VAT for specific sectors, such as leisure and hospitality, would help to soften the blow from having to remain closed for longer.

Job creation could be on the cards

As PM Boris Johnson announced last week that the Government would introduce an ‘opportunity guarantee’ giving every young adult the chance of an apprenticeship or an in-work placement, Mr Sunak will be expected to put flesh on the bones of this promise on Wednesday.

It is probable that the chancellor will announce an offer to subsidise workers’ wages for companies preserving existing employment or taking on new staff.

Business leaders are keen for the chancellor to cut employers’ national insurance contributions (NICs) which are, according to research from the Institute for Employment Studies, the single largest non-wage labour cost faced by employers.

The IES argues that the current system represents a tax of 13.8pc on earnings above £8,788 per year, adding around £2,400 to the cost of employing a person on an average wage.

Mr Sunak could either raise the threshold at which employer NICs are paid across the board or tailor the measures to specific age groups, for example, exempting those under 30 to increase employment opportunities for young adults.

Business rates could be ‘tweaked’

By levying taxes on companies based on the value of the buildings from which they operate, the chancellor could adjust business rates which bring in about £30bn for the Treasury each year.

Industry groups have urged the chancellor to extend to other companies the business-rate ‘holidays’ granted to retail, leisure and hospitality firms during the crisis.

Exemptions or grants for some companies are more likely on Wednesday rather than major changes, as a promised ‘fundamental review‘ of business rates is due in the autumn.

The system has been pinpointed for reform time and again, with calls for it to be replaced by an online sales tax, in recognition of the fact that e-commerce giants such as Amazon pay significantly lower business rates because they operate from warehouses rather than a chain of high-street locations.

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