On Wednesday, the chancellor will attempt to shore up Britain’s economic recovery from coronavirus as lockdown controls are lifted across most of England. But Rishi Sunak is facing a delicate balancing act while severe risks to public health remain.
Although expectations that this will be a blockbuster summer statement are being downplayed, here are some of the policy changes the chancellor is thought to be considering for this week’s economic update.
The government is preparing to scale down the furlough scheme from the end of this month. Currently, the programme funds 80% of employees’ wages but it will end entirely in October after being trimmed from August onwards.
As many as 9.3 million jobs have been furloughed at 1.1 million companies, at a cost to the exchequer so far of £25.5bn.
Hospitality industry leaders have called for the government to extend support to the sector for longer, while Anneliese Dodds, Labour’s shadow chancellor, has demanded that Sunak ditch a “one-size-fits-all” wind-down of the scheme and provide targeted sectoral support.
The Resolution Foundation thinktank has suggested the chancellor use Wednesday’s address to turn the furlough scheme into a job creation programme, which would subsidise the wages of workers in the most heavily affected sectors – such as aviation – until at least the end of next year.
However, the Treasury is understood to dislike a sector-specific plan, as it would be difficult to administer and could be seen to favour some industries over others.
Sunak has come under pressure to announce a cut in the rate of VAT from the current level of 20%, to help boost consumer spending and support households that have experienced reductions in incomes during the crisis.
Such a move would be straight out of the Treasury playbook for handling recessions. In 2008, an emergency VAT cut by the Labour chancellor of the time, Alistair Darling, drove up retail sales by about 1%, helping the economy recover from the financial crisis. Darling cut VAT from 17.5% to 15%, at a cost to government of £12.5bn.
Sunak’s predecessor, Sajid Javid, has said that the Treasury should be thinking about a three-percentage-point cut to 17%, which he said would cost about £21bn.
However, economists argue that the main barrier to people spending right now isn’t price. Some households have been able to save money while being confined at home during lockdown, meaning there is sufficient pent-up demand for spending in future. A bigger driver for a rebound in sales might be greater confidence in the diminishing health risks posed by Covid-19.
However, there is speculation that the chancellor could cut VAT for specific sectors, such as hospitality and leisure, that would help to cushion the blow from having to remain closed for longer.
Epidemics of infectious diseases behave in different ways but the 1918 influenza pandemic that killed more than 50 million people is regarded as a key example of a pandemic that occurred in multiple waves, with the latter more severe than the first. It has been replicated – albeit more mildly – in subsequent flu pandemics.
How and why multiple-wave outbreaks occur, and how subsequent waves of infection can be prevented, has become a staple of epidemiological modelling studies and pandemic preparation, which have looked at everything from social behaviour and health policy to vaccination and the buildup of community immunity, also known as herd immunity.
This is being watched very carefully. Without a vaccine, and with no widespread immunity to the new disease, one alarm is being sounded by the experience of Singapore, which has seen a sudden resurgence in infections despite being lauded for its early handling of the outbreak.
Although Singapore instituted a strong contact tracing system for its general population, the disease re-emerged in cramped dormitory accommodation used by thousands of foreign workers with inadequate hygiene facilities and shared canteens.
Singapore’s experience, although very specific, has demonstrated the ability of the disease to come back strongly in places where people are in close proximity and its ability to exploit any weakness in public health regimes set up to counter it.
In June 2020, Beijing suffered from a new cluster of coronavirus cases which caused authorities to re-implement restrictions that China had previously been able to lift. In the UK, the city of Leicester was unable to come out of lockdown because of the development of a new spike of coronavirus cases.
Conventional wisdom among scientists suggests second waves of resistant infections occur after the capacity for treatment and isolation becomes exhausted. In this case the concern is that the social and political consensus supporting lockdowns is being overtaken by public frustration and the urgent need to reopen economies.
The threat declines when susceptibility of the population to the disease falls below a certain threshold or when widespread vaccination becomes available.
In general terms the ratio of susceptible and immune individuals in a population at the end of one wave determines the potential magnitude of a subsequent wave. The worry is that with a vaccine still many months away, and the real rate of infection only being guessed at, populations worldwide remain highly vulnerable to both resurgence and subsequent waves.
Boris Johnson announced last week that the government would introduce an “opportunity guarantee” for young people, giving every young adult the chance of an apprenticeship or an in-work placement. Sunak will be expected to flesh out the bones of this promise on Wednesday.
It is likely that there will be an offer announced by the chancellor to subsidise workers’ wages at companies taking on new staff or preserving existing employment.
Business leaders are urging the chancellor to cut employers’ national insurance contributions (NICs). According to research from the Institute for Employment Studies, NICs are the single largest non-wage labour cost faced by employers. The IES says that the current system represents a tax of 13.8% on earnings above £8,788 a year, adding about £2,400 to the cost of employing someone on an average wage.
Sunak could raise the threshold at which employer NICs are made across the board. An alternative could be to tailor the measures to specific age groups – for instance by exempting those under 30 to boost employment opportunities for young adults.
The chancellor could tweak the system of business rates, which brings in about £30bn for the Treasury each year, by levying taxes on companies based on the value of the buildings from which they operate.
Industry groups have called for the business-rate “holidays” granted to retail, leisure and hospitality firms during the coronavirus crisis to be extended to other companies.
Sweeping changes are unlikely to be made on Wednesday, before a promised “fundamental review” of business rates due in the autumn, meaning exemptions or grants for some companies are more likely at this stage.
The system has been repeatedly earmarked for reform, with calls for it to be replaced with an online sales tax, to account for the fact that e-commerce powerhouses such as Amazon have comparatively low business-rates bills because they operate from warehouses and not a chain of high-street sites.