- KPB & Co Research
Rishi Sunak has certainly hit the ground running after becoming the Chancellor of the Exchequer of the UK in February 2020, a month before the Coronavirus pandemic hit Europe. Since then he has announced a number of fiscal packages directed at stabilizing the UK economy, as the entire country went into lockdown mode. With the country now emerging from lockdown, he has announced a new set of fiscal initiatives directed at energizing economic activity. His strategy is centred around incentivizing businesses to re-hire furloughed workers, hire young people, and create new roles for workers in the construction and hospitality industries.
The range of policy initiatives announced by the Chancellor is expected to cost around £30Bn, with most of it allocated toward a replacement for the "Job Retention Scheme" that will end in October 2020. In the early days of the crisis, the government budgeted about £160Bn to accommodate the needs of 11 million workers that were furloughed, 1 million businesses that needed financial assistance, and such public services as the NHS and public transportation that needed additional resources. Going forward, the government is seeking to streamline the amount of support that will be provided to the economy, primarily as a means to stop the haemorrhaging on the treasury. How will he do this?
A Job retention bonus
The British government is offering companies £1,000 for each furloughed worker who is brought back on staff and continuously employed until January 2021. For companies to obtain the bonus, these employees would have to be paid at least £520 (equivalent to the lower earnings limit in National Insurance) per month starting in November up until the end of the period. It is important to note that this is expected to be a one-off payment, and as such the strategy is expected to be net positive for the economy as companies will be expected to cover at least £1,560 for the period. The plan is expected to cost a maximum of £9Bn in a scenario where all 9 million furloughed workers are brought back. On top of this, the treasury will provide an additional £1Bn for the Department for Work and Pensions to expand services such as Universal credit.
In the coming months, another 700,000 youths are expected to join the workforce in an environment where opportunities for employment will be challenging. In this context, the government has committed to underwrite the entire cost for a company to hire and train these youths for more permanent roles. The scheme will pay companies a grant that will cover wages for six months, plus an amount to cover overheads for each youth who is:
- Between the ages of 16-24 years
- Working for a minimum of 25 hours per week
- Paid at least the national minimum wage
- Employed in a newly created role
As of April 2020, the minimum wage ranges from £4.15 to £8.72 depending on the age of the worker in question. According to the Chancellor's calculations, a 25-year-old youth would see his/her employer receiving approximately £6,550 for the period. The budget office has already set aside £2Bn for the initiation of the program and does not expect to place a cap on the number of spots available. The government will also pay companies an additional £1000 for hiring new trainees, which is expected to allow a 3 fold increase in the number of youths taken up in the training program. The government describes a trainee program as:
free course that includes a work placement, lasting between six weeks and six months and targeted at under-25s. The work placement must last at least 60 hours. Employers will have to offer training including English, maths, CV writing, and “what to expect in the workplace, — UK Treasury
In order to assist new graduates aged 18-19 to get work in high demand sectors ( engineering, construction and social care) the government will provide £100Mn to create more places on level 2 and 3 courses. To incentivize the hiring of apprentices, the government will give companies £2000 for each new young apprentice hired, and £1500 for each apprentice aged 25 and older.
Construction Industry Support
Housing construction is usually seen as a major driver of employment in Keynesian economic philosophy, and as such in times of economic malaise governments are quick to turn to this area to jump-start economic activity. It is no surprise therefore, that construction is one of the areas that the treasury will be focused on. Rishi announced £3Bn green job plans gearing at reducing the carbon footprint while creating about 140,000 jobs. The program is expected to allow 650,000 households to save £300 per year, and will consist of the following:
- A £2Bn green home grants. Starting September homeowners and landlords will be able to get vouchers up to a maximum of £5000 per household to make their home more energy-efficient. Low-income household will get up to £10k.
- £1Bn for public sector buildings to improve energy efficiency.
- £50Mn for a pilot study to find the right approach to decarbonize social housing.
Along with these measures are plans to incentivize the buying and selling of homes, by raising the threshold for stamp duty charges on the purchase of a property. The current threshold is about £125,000 which is expected to increase to £500,000 until March 2020, saving an average of £4,500. This is perhaps one of the more controversial initiatives, with many arguing that this policy only supports the rich.
Support For Hospitality and Tourism
The final part of the plan involves support for a sector that employs over 2.4 million people across the UK, and that had just over a million furloughed workers at the height of the pandemic. This impacts over 150,000 companies that are engaged in accommodations, attractions, restaurants, lodging, cinemas, theme parks and, zoos. Support for these companies will cost a total of £4Bn and will come in the form of:
- A reduction in the Value Added Tax (VAT) rate from 20% to 5% for the next 6 months
- An Eat Out to Help Out discount amounting to 50% of the cost of a meal up to a maximum of £10 per head for everyone who eats out in the month of August. Registered businesses that offer this discount will be reimbursed within 5 working days after they make the request.
As the UK economy gradually re-opens, the treasury is now gearing up to allow the economy to thrive on its own. Continued unprecedented support is unrealistic and would likely come with significant long term consequences. At the same time, pulling support too early could lead to a multi-year recession similar to what happened in the 1930s. There is also the possibility of a new surge in COVID-19 cases which could delay a return to normalcy. In light of these issues, it is quite likely that the ultimate withdrawal of government support will be data-dependent. If the spread of the infection continues to stay low, and economic conditions get back to normal, Rishi's full plan may work well. If on the other hand, there is a resurgence in COVID-19 cases the government would likely have to make adjustments as the current government support run out.