10 Jul 2020

Stormbreaker? DRD Analyst Bella Soames looks at the Chancellor’s announcements this week, the response to them, and what comes next.

10 July 2020

DRD Analyst Bella Soames looks at the Chancellor’s announcements this week, the response to them, and what comes next.

When Rishi Sunak became Chancellor, he hired Cass Horowitz as his Communications Special Adviser. Horowitz – the son of writer Anthony Horowitz, who penned a classic of the teenage literary canon, the Alex Rider series – has overseen a transformation and amplification of Sunak’s public image. Though the temperature regulating mugs, tactfully positioned Tupperware and tee-total, pub-related self-aggrandisement have prompted ridicule in some quarters, it is working: the latest YouGov poll shows that by 59 per cent to 11 per cent people think Sunak is doing a good job and he is already being touted as Boris Johnson’s successor – whether the PM likes it or not.

It is not just “Dishy” Rishi’s personal logo, or his snappily titled Plan for Jobs, Sunak has endorsed an approach to Government policy and its communication at best undervalued, at worst willfully ignored, in Westminster circles: under-commit and over-deliver. Thus, when he leapt to his feet at the Dispatch Box on Wednesday afternoon, press briefings of minor cuts to VAT and Stamp Duty were superseded by the biggest announcement of the day: the Job Retention Bonus, which promises £1,000 to employers for every employee brought back from furlough and employed until at least the end of January. And the surprises kept coming: raising the Stamp Duty minimum threshold from £125,000 to £500,000; a larger VAT cut than anticipated of 20 per cent to 5 per cent for the hospitality sector; a shiny “Eat Out to Help Out” scheme – fifty per cent discounts on meals in August, up to £10 per meal; and, a £2.1 billion Kickstart Scheme to provide jobs for young people. The Chancellor’s announcement totaled £30 billion in economic stimulus, in addition to the £160 billion of pandemic-related support already announced.

Despite initial jubilation at the prospect of a semi-nationalised La Reine (Pizza Express’ finest offering), reaction to the Chancellor’s individual announcements was understandably mixed. Labour were quick out the blocks (proving that they too, when the nation needs them, can do snappy messaging) referring to the “Eat Out to Help Out” scheme as demonstrative that the Chancellor had promised a “New Deal” but produced a “Meal Deal” – a painfully easy line, but one that is arguably not far off the mark. Indeed, the Resolution Foundation published analysis showing that the scheme is too small to have a major impact, though the temporary VAT cut is a significant measure.

Likewise, the Job Retention Bonus: deemed to be poorly targeted at the 1 million jobs that are most at risk and, therefore, unlikely to prevent significant weakening of the labour market. Uncertainty about the financial deadweight in the Bonus (in the form of payments made to firms who had no intention of laying off furloughed staff) has only been sharpened by letters published by HMRC in  which the HRMC Permanent Secretary Jim Harra warns the Chancellor against it due to concerns of “value for money.”

While it is not unusual for Ministers to go ahead with a policy decision in spite of such advice, Sunak has already been forced to defend the Bonus, acknowledging the potential for deadweight, but arguing that acting in a broad way, at scale and at speed was more important than a targeted, more nuanced but inevitably slower approach. Incidentally, the Resolution Foundation found that the UK’s fiscal response has so far been larger as a proportion of GDP than that of France, Italy, Spain, or Canada, but behind that of Germany, Australia, Japan and the US.

But what does it all mean? In the short term, there seems to be a broad consensus that this package of measures is not enough and more stimulus to support the economy will be needed in the Autumn. Indeed, the Government has already noted in its “A Plan for Jobs” (in the small print, mind) that it intends to support those who are out of work for a longer period with a new, large-scale employment support offer. There is more to come – and, lest we forget, Covid-19 is not going away.

Looking further ahead, the main thing we should be looking at are the levels of Government borrowing. Covid-19 has exploded the cash limits placed on Whitehall spending that were introduced following the IMF crisis in 1976. Strikingly, in some areas, the Government’s additional spending is larger than that of several government departments. For example, the likely bill for PPE for frontline staff in the pandemic will be £15 billion – only slightly more than the 2019-2020 cost of the Home Office, the Foreign Office and the Treasury combined; the cost of the test, track and trace system is similar to the annual (?) day-to-day costs of the Department for Transport.

The Chancellor’s announcement this week leaves Government borrowing this year on course to reach £350 billion – more as a share of GDP than it ever has done in the last three hundred years (outside of the two World Wars). The Director of the Institute for Fiscal Studies, Paul Johnson, was not alone in pointing out that there has been no intervention of this kind in history – but then there has not been a crisis of this kind in peacetime.

For now, the Government can afford to borrow; Government borrowing – due to historically low interest rates – is incredibly cheap (but the money tree in the Bank of England’s back garden won’t last forever). When, and if, a “new normal” is reached, revenues are likely to be depressed, and it is unlikely that the bulk of the future deficit reduction will come from an economy beginning to fire on all cylinders again. It’s a quick fix ‘budget’ to try to manage an unprecedented situation – but this was arguably the easy bit – what comes next is going to be the real test for Sunak and his team: paying the money back. This means spending cuts, or, more likely – given that the country is emerging from a decade of austerity – tax rises.

The first Alex Rider novel, Stormbreaker ends with the protagonist accidentally shooting the Prime Minister. Sunak and his team know that tough decisions lie ahead on the economy. When tax rises inevitably come, he will need more than some trendy graphics to secure his reputation amongst the Tories: he has a clear shot at the Prime Minister now, but he might find it trickier to get him in his sights come the Spring.

PHOTO Credit: UK Parliament / Jessica Taylor / Handout via Reuters

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