The Summer Statement: will it work?

14th July, 2020

The Chancellor’s Summer Statement set out plans to bring the UK economy off life support. Rishi Sunak announced a flurry of tax cuts and business support measures to prop up the UK’s flagging industries and encourage consumer spending. Has he done enough?

The job retention bonus is appealing, though there have been questions asked over whether it is enough to prevent hard-pressed employers announcing redundancies. Ultimately a £1,000 bonus probably won’t make the difference for businesses that really can’t afford salaries; it may just give a boost to those companies already planning to bring workers back. That is still likely to find its way into the economy but may not prevent all job losses.

Alan Custis, head of UK equities at Lazard Asset Management pointed out that the market’s early response has been somewhat anaemic: “Even those sectors that have been directly targeted for help, such as pubs and restaurants and housebuilders, are seeing little in the way of a positive response.”

VAT cuts on food, accommodation and attractions will certainly put money back in people’s pockets – food forms around 10% of the average family budget. Subsidised dining may tempt some back into restaurants, but there will be other worries at work apart from costs. Many are still scared to leave their homes, and this is not a problem easily remedied with financial incentives.

There are notable winners, however. Grants for making homes more energy-efficient are a welcome boost, both for the environment and for home improvement businesses. There is also a renewed commitment to accelerating spending on infrastructure – while not much of the £8.6bn of capital spending is new money, it is at least being spent earlier.

The problem, as always, is that these measures have to be paid for. At the moment, the Chancellor can enjoy his consequence-free spending moment, but at some point, he will have to try and rebalance the books. The government may have reduced the budget deficit in recent years, but the structural deficit is still edging towards £2 trillion. The UK’s finances still leave little room for manoeuvre.

Certainly, the recent stimulus measures should generate increased economic activity and, by extension, higher tax receipts, but it seems inevitable that taxes will rise at some point. The Chancellor has dropped some heavy hints about a potential wealth tax, and it is likely that some expensive tax reliefs (pension contributions?) will disappear.

These may be announced as early as the next budget.

There are no easy wins here. The Chancellor has proved himself creative in getting the UK’s finances through the crisis, but there are still tough times ahead.

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