In this piece, FPC’s Independent Economic Consultant, Peter Stanyer shares his thoughts on the Chancellor’s statement and its economic implications:
Rishi Sunak’s Summer Statement is a judgement call on uncertainty as the UK (and most of the developed world) emerges, it is hoped once and for all, from the economic chasm of the pandemic ‘lock-downs’. In the words of The Economist magazine, “the hole [was] not as deep as official forecasts feared but climbing out may take longer than hoped”. For the UK, that hole will have been about one quarter of GDP for a few months, and overall GDP is likely to be around 6% lower this year than in 2019.
The Chancellor’s statement included the removal of stamp duty from the first £500,000 of house purchases; a payment of £1,000 per employee brought back to employment from furlough; a number of schemes to encourage apprenticeships and youth employment; and a reduction in VAT from 20% to 5% for hotels, restaurants and the hospitality sector. The cost of the measures announced yesterday is estimated at £30 billion, or around 1.5% of pre-covid GDP. This is a very big number, though much smaller than the big numbers that came before it. The budget deficit is now expected by the Resolution Foundation to be around £350 billion this year, or around 16% of pre-covid GDP. These are mind-boggling numbers.
From saving to spending?
During this extraordinary time, throughout the world households have been saving much more than they expected to save, even though food banks (in the UK and the US) have experienced unprecedented demand, as government safety-nets have had gaps in them. Those able to keep working (often from home) or living off their savings have suffered little interruption in income and being unable to spend as they would wish, they have saved in what seem to be very large amounts.
As constraints on workplaces and social distancing have been eased, signs of renewed consumer spending have been growing around the world. The Chancellor’s judgement call is that this is not enough to ensure that the registered unemployed will not be swelled by many of the nine million furloughed in the UK. But he is determined to pave the way to the future not cling onto the past.
Jobs jobs jobs
The government’s message appears to be: Jobs jobs jobs, but please don’t expect us to bank roll yesterday’s pattern of employment. So universal furloughing (always a crisis support measure) is being scaled back, but restaurants, hotels and the hospitality sector will be encouraged and anything helped by a buoyant property market is welcome. However, do not expect the tax payer to support yesterday’s pattern of employment in retail.
Many worry about the affordability of this increase in the national debt. The IFS in their commentary emphasise that affordability and worrying about tax rises are tomorrow’s problems. Economists agree that the biggest contribution that the government can make to financing the debt is to ensure that GDP recovers as quickly as possible, and that productivity growth then helps it grow. This is the key to future tax revenue. Additional taxation will come later (not before 2022 implied the IFS), but with a clear focus on encouraging incentives to create wealth.
Extremely low interest rates make the Chancellor’s task much easier. These are expected to stay for the foreseeable future.
Peter Stanyer is co-author with Professor Stephen Satchell of The Economist Guide to Investment Strategy, 4th edition, Profile Books, 2018. The views expressed are his own personal views, and do not constitute advice to buy, sell or hold any investment.
There were a whole raft of measures, some of which didn’t get a mention in his speech so check out the full policy document to find out more.