Five things to look out for in Rishi Sunak’s summer economic update

Despite the rhetoric, Boris Johnson’s economic speech last week was a bit of a non-event in policy terms. £5 billion of fast-forwarded infrastructure spending hardly seemed proportionate for the scale of economic crisis the UK currently faces. That, and the lack of any specific economic detail, means that all eyes now turn to the chancellor’s ‘summer economic update’ on Wednesday 8 July, in which we can expect Rishi Sunak to lay out the government’s support package for the next stage of the crisis.

There will be some big numbers, perhaps some tax cuts, and a reiteration of the promise to do ‘whatever it takes’. Here are five things to look out for in Sunak’s speech. 

1. What type of recovery is the Treasury expecting?

If this were an official ‘fiscal event’ – a budget or autumn statement – much of the attention would be on the Office for Budget Responsibility’s official economic forecasts. There will not be any forecasts to accompany this economic update – but the chancellor must have some idea about how he expects in the recovery to progress in order to draw up an appropriate policy response. Will it be a strong, ‘V-shaped' recovery or a depressed ‘Nike swoosh’ one such as that which followed the 2007/08 financial crisis? Or somewhere in between?

Sunak is unlikely to set out his prognosis explicitly. But the scale, timing and nature of the policy package he announces may give some clues. The bigger the package is, and the longer it is due to last, the more likely it is that the Treasury is expecting a long, slow recovery – needing significant support from government. If the package focuses more on structural adjustments on the supply side – such as re-training programmes – rather than simply demand stimulus, the signs are that the chancellor is expecting a different sort of economy to emerge post-Covid than the one we had back in February.

In short, if the economy is expected to be permanently changed the statement will be less about propping up pubs and restaurants and more about retraining their staff in occupations with better prospects.

2. How big will the stimulus be, and will it outweigh the support being withdrawn?

The government has racked up record deficits as it has supported households and public services through the lockdown. Support has come mostly via the Coronavirus Job Retention Scheme (CJRS) and Self-Employed Income Support Scheme, which together have cost around £13bn per month since April. Both are due to end in the autumn. That points to a big reduction in government support – unless the new stimulus package is very large.

Johnson announced only £5bn (less than 1% of UK GDP) of infrastructure spending in his self-proclaimed ‘Rooseveltian’ speech last week – some of which will not be spent until late next year. This amount is unlikely to move the economic needle much. Some other countries have already committed much more – Germany’s package, for example, amounts to 3.8% of its GDP, which would equate to £84bn in the UK.

To understand how significant Sunak’s measures are likely to be, a good place to start will be the total price tag, and how that compares it to the more-than £10bn a month of support that will be withdrawn from the autumn.

3. Will support be ‘across the board’ or targeted at specific industries?

A key question for the chancellor is whether the next stage of the crisis calls for general, across-the-board stimulus measures or support that is more targeted.

In the first phase of the crisis, most of the support was offered across the economy, as the whole country was in lockdown and few people and businesses were entirely unaffected. But while the recovery phase could see a relatively smooth return to work in most industries, some sectors such as bricks-and-mortar retail, leisure and tourism – likely to continue to suffer from social distancing measures and restrictions on travel – are expected to fare less well. With the lopsided nature of the recovery, across-the-board incentives to spend may be poorly designed to achieve the desired effect and offer support the sectors that need it most.

The chancellor has already announced specific funding for the arts, where almost all venues remain closed. But as he designs measures to stimulate consumer spending in other sectors of the economy that are open but restricted, will he provide broad incentives to encourage spending in general (including for unaffected, or even thriving, sectors like online retail), or will he focus incentives on those sectors that have been worst hit? Germany has done both: it introduced a temporary across-the-board VAT cut, but also applied additional VAT reductions to the restaurant sector to encourage more people to spend their money there.

Across-the-board support is often easier to implement and avoids the risk that some businesses in need miss out, but it can be poorly designed, offering less bang for the chancellor’s buck. It could even be actively counter-productive – fuelling inflation – if there is already pent up demand after months of lockdown. For example, if people are planning to use their ‘lockdown savings’ to purchase a new car, a VAT cut that also applied to cars could lead to even more demand, longer waiting lists and/or higher prices.

4. How is the government planning to alleviate higher unemployment as the CJRS ends?

The CJRS is currently supporting a substantial fraction of the private sector workforce, but it is being phased out over the next few months and will cease altogether at the end of October. In his speech, Johnson acknowledged that many jobs that existed in January will not come back and that this was the “biggest and most immediate economic challenge” facing the UK.

Johnson also reiterated a commitment to an “opportunity guarantee” for young people; the chancellor may provide more details on that. But we should also expect more support to be announced for those already in the labour force.

There are broadly two types of policy that the government might adopt to help unemployed workers. The first are incentives for employers to take on or retain more employees, such as a temporary cut in employers’ National Insurance contributions (NICs). The second are re-training schemes to help those the newly unemployed learn new skills that will make them more employable in sectors that have a brighter future. There is evidence that these sorts of schemes were effective in the wake of the 2007/08 financial crisis, but the unique nature of the current crisis makes predicting what types of jobs will actually be required in the future makes devising re-training programmes hard.

5. Is the £5bn of fast-forwarded public infrastructure spend all we’re going to get?

In his speech, the prime minister pledged an extra £5bn of infrastructure spending, equivalent to 0.25% of GDP. This is a much smaller amount than the boost to investment spending that Alistair Darling announced as chancellor during the financial crisis, which increased by over 1% of GDP between 2007/08 and 2008/09.

Johnson’s infrastructure announcements centred on public services. If the government is going to – as the prime minister said – “build back greener” and use the fiscal response to the coronavirus crisis to make further progress towards the government’s net zero ambitions, we might see more investment announced by the chancellor designed to secure a green recovery. The trailed announcement of £2bn for home insulation suggests that there may be a green focus to his speech. But this is still much smaller than sums committed in other countries: Germany, again, has led the way here, earmarking €40bn of stimulus spending to go towards green projects.