Five things we learnt from Rishi Sunak's summer economic statement

The government’s economic response to coronavirus is moving from the first ‘rescue’ stage, begun in March with the implementation of the lockdown and associated economic packages to mitigate its effects, to the second ‘recovery’ phase. Announced by the chancellor in the Commons on Wednesday 8 July, the new phase will focus on creating and protecting jobs. Here are five key takeaways from Rishi Sunak’s speech.

1. The overall package was small

The new measures that Sunak announced amounted to up to £25 billion of extra public spending or lower taxes – on top of the £5bn of fast-tracked investment spending announced by Boris Johnson last week. In normal times, this package (worth a little over 1% of GDP) would be considered a large fiscal giveaway. But right now this extra stimulus looks small – both compared to the current government support that will be withdrawn through the autumn and to what other governments elsewhere have done.

Sunak confirmed that the furlough scheme – which currently subsidises wages to the tune of £10bn a month – will end in October. That will be replaced by a new Job Retention Bonus, a £1,000 payment to employers who keep employees on until at least the end of January 2021. This will distribute a maximum of £9.4bn, although it could be much less and that money will not reach its recipients until February.

Other countries have announced much larger stimulus packages. Germany’s coalition government has announced a package worth almost 4% of GDP; Japan’s government has announced measures worth 20% of GDP.

2. Some groups were helped substantially – but others less so

Despite the small overall size, three groups received substantial targeted help: young people searching for work, and the hospitality and tourism sectors.

Those aged under 25 – who the government rightly acknowledge are most at risk of losing or struggling to find work – stand to benefit from a range of new schemes. The Kickstart Scheme will subsidise wages for unemployed young people hired into newly created jobs, while more money will also be available for traineeships, apprenticeships and careers-coaching for young people. In contrast, there was much less extra help for those aged over 25 and in similar positions, who stand to lose out as the furlough scheme is wound down.

The hospitality and tourism sectors – which continue to be hit hard by social distancing measures and restrictions on travel – were also targeted in the chancellor’s statement. They will benefit from a temporary cut in VAT; there is also a new “Eat Out to Help Out” scheme subsidising restaurant meals in August. However, high-street retail – which also continues to be affected by social distancing – received little new help.

3. The Treasury views a lack of demand in specific sectors as one of its biggest economic headaches

The coronavirus pandemic and associated economic shutdown have created a range of economic problems, including a sharp drop in demand for the services of bricks-and-mortar shops, restaurants, hotels and entertainment venues – which were in any case required to remain closed until very recently. The requirements of social distancing have affected the way many businesses operate, often increasing costs. These changes will have to remain in place until more effective treatments or a vaccine can be developed.

As the economy reopens, economists outside government have pointed to concerns that businesses may still hold back from investing or employing more people because of continued uncertainty about public confidence and demand, as well as the fact that they have taken on a lot of additional debt during the lockdown.

The set of measures announced by the chancellor this week suggests that the Treasury’s current diagnosis is that there will be two main problems: a lack of jobs (particularly for younger workers) and a lack of demand for some types of businesses that require face-to-face interaction. Indeed, the two are related in important ways – fewer people visiting restaurants mean fewer waiters need to be hired.

These demand concerns are valid. But they are not the sole threat, and there was little to ease the supply-side constraints that those sectors continue to face (with the partial exception of “Eat Out to Help Out”, which may smooth demand across days of the week). Nor was there any mention of help being offered to companies that have taken on substantial new debt during the lockdown.

4. The measures risk opening the government up to ‘deadweight’

Many of the measures announced are well targeted at the worst-affected sectors. But the purpose of a stimulus package is to encourage activity that would not otherwise have happened. With any package, there is a risk of what economists call ‘deadweight’ – spending money to subsidise activity that would have happened anyway. There are three areas in which this may pose a risk:

• The Job Retention Bonus may mainly provide a cash bonus for businesses that already intend to take back previously furloughed workers, including those who have already returned from furlough ^[1].
• The temporary stamp duty cut applies to all house purchases – not only those transactions that would not otherwise have happened or would have happened later. Evidence from similar previous schemes suggests temporary stamp duty cuts will mainly feed through into higher house prices and not lead to a big increase in the total number of transactions ^[2].
• The VAT cut and Eat Out to Help Out schemes benefit everyone, regardless of income. Many higher-income households are likely to have returned to restaurants anyway, having saved more during the pandemic. Any extra trips induced by these policies may account for a small fraction of the total cost of the relief.

5. The Treasury’s job is not done – and phase three could be tougher to plan

Sunak said the government “will do all we can to give people the opportunity of good and secure work”. The question that will prey on Treasury officials’ minds over the coming weeks and months is whether the measures announced on Wednesday will be enough.

The Treasury has rightly attracted praise for its flexible approach during the lockdown – adapting policies and introducing new programmes as evidence emerged of remaining problems and gaps in support. But the decisions that the government faces in tailoring policy in the recovery phase are much harder than those it faced in the early stage of the lockdown. There is a risk of doing too much as well as doing too little.

Even as Treasury staff tweak this second phase of measures the public will be waiting keenly for the third phase that Sunak alluded to in his speech. That third phase – which he said would be laid out in the autumn budget and spending review – will be when the British public face the fiscal reckoning to put the UK’s public finances “back on a sustainable footing”. What is needed from the Treasury then will depend in part on how successful it is now. The job is far from over.