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July 8, 2020

UK: Plan for jobs – Does strategic ambition match fiscal cost?

BY Carsten Nickel

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Chancellor Rishi Sunak has presented his plan for jobs, the second part of the government’s set of economic measures to fight the impact of the pandemic, in the Commons today. The first stage of GBP 160bn had been designed to help the UK economy through the virus-inflicted hibernation period, mainly via increased spending on the national health service and a far-reaching (by UK standards) furlough scheme. In contrast, today’s second package was focused on getting the economy back to work. The focus was therefore on job retention, training, (green) investment and selected tax incentives.

Today’s package adds another estimated GBP 30bn to the overall cost for the government’s support measures so far, next to the GBP 120bn in already announced loans, guarantees and tax deferrals. The Conservative government’s willingness to borrow and spend substantial sums is the effect of an ongoing process of political change in UK party politics. But compared with the sheer amount of fiscal resources thrown at the economy, the contents of the measures do not (yet) reflect a bold new plan for economic policy.

For instance, a combined GBP 8.4bn are envisaged for VAT cuts for the hospitality and restaurant sectors as well a temporary cut to stamp duty (property tax). But regarding the former, it is an open question whether customers will return to hotels and pubs just because of such tax cuts, as long as the fear of the virus remains strong. The government’s protracted struggle with the introduction of a thorough testing and tracing regime, and the problems with enabling local authorities to swiftly enact local lockdowns if required, might turn out to be too big an obstacle to be overcome with short-term tax incentives. Regarding the stamp duty cut, this is intended to get the property market going again – rather than addressing the structural overreliance of the British economy on precisely that sector. Other areas of the economy, from retail businesses to the aviation sector, remain largely unaddressed, while the single largest item of up to GBP 9.4bn will be spent on incentives for retaining currently furloughed employees.

The risk of a mismatch between cost and strategic ambition is therefore the key signpost to watch over the medium-term. The looming economic crisis will play out simultaneously with the ongoing realignment of party politics, while the current borrowing and spending spree might diminish the government’s room for political maneuver going forward. After all, it is still far from clear that the new, socio-economically disparate coalition of voters backing the Tories under PM Boris Johnson will hold together. Brexit was a project uniting that electorate, but the need to spend big now to get the economy going again might seriously constrain the government’s ability to finally start working towards a more structural approach to the UK economy in the future. The resulting political volatility could make it even harder to chart a way forward into the post-pandemic economy.

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