UK mini budget delivers minimal boost
The Chancellor’s latest measures are unlikely to have a significant impact on jobs or wider demand.
UK Chancellor of the Exchequer, Rishi Sunak, provided a summer statement which could have easily been mistaken for yet another budget. The update was designed to mark the second phase of the government’s plan to stimulate the economy in the wake of Covid-19.
The first phase was the protection of households, with the creation of the jobs retention scheme, and the credit guarantees for businesses. This second phase focuses on the safeguard for jobs. Finally, the third phase is investment in infrastructure, which will be covered by the Autumn Budget and Spending review.
The key announcement from this update was the introduction of the new Jobs Retention Bonus. The government will pay firms £1,000 per employee that returns to work, as long as they earn at least £520 per month, and remain in work until January 2021. Given over 9.1 million jobs have been furloughed, this could cost the exchequer at least £9.1 billion.
To help younger members of the workforce, a new Kick-start scheme has been introduced which will part subsidise new jobs for up to six months. This comes in addition to investment in the work the Department for Work and Pensions does to assist people back to work from unemployment.
Otherwise, there was a significant boost for the housing market as the threshold to pay stamp duty was raised from £125,000 to £500,000 until 31 March 2021. Moreover, grants are being made available to help improve insulation and the efficiency of homes.
Finally for restaurants, accommodation and attractions, VAT is to be lowered from 20% to just 5% until the middle of January 2021 at a cost of £5 billion. Moreover, a new scheme called “eat out to help out” has been introduced that will offer government funded 50% (up to £10 per person) discounts for households dining in eateries.
Overall, the Chancellor has announced some large and expensive schemes, but which are unlikely to have much of an impact on jobs or wider demand. As the opposition Labour Party shadow chancellor Anneliese Dodds rightly points out, the key reason for job losses and people staying away from restaurants is a fear of contracting or passing on the coronavirus, as she urged more investment in the track and trace scheme.
A £1,000 bonus per member of staff is hardly going to make a difference for firms that are no longer economically viable, either due to social distancing restrictions or changing behaviours. Some firms may now temporarily bring back staff only to collect the bonus and let them go in January, but the majority of the bonus payments will simply go to firms that had planned to bring back their staff in any case.
As for the Kick-start scheme for young workers, the government could have simply scrapped national insurance contributions, or even lowered income tax for those younger workers. Instead, they have created an incentive for a merry-go-round jobs market, where companies have an incentive to replace young workers to receive the next bonus payment. This sort of scheme has been shown to fail in countries like France.
The targeted VAT cut is better than no cut at all, but a wider VAT cut on goods bought in person would have been far more powerful. It would have provided an incentive for households to go out to shop, which often leads to eating out too.
Disappointingly, the policy changes announced today will do little to boost wider demand in the economy. The chancellor may have to return with more measures in the near future.
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