Our Response to the Chancellor's Summer Statement

Covid-19 Economy & sustainability

Our Response to the Chancellor's Summer Statement

Commentary
Posted on: 8th July 2020
By Multiple Authors
Sam Alvis
Senior Advisor
Ian Mulheirn
Executive Director and Chief Economist
Steve Coulter
Head of Industrial Strategy, Skills and Sustainability

Fiscal Implications - Can We Afford it? Is it Enough?

The Chancellor’s summer statement involved more eyewatering fiscal figures, with the total cost of the package estimated to be £30bn – a stimulus of roughly 1.5 per cent of GDP. This isn’t especially huge in the context of such a large economic shock and with monetary policy already at the limit. Nevertheless, coming on top of £160bn of extra fiscal support through the acute phase of the crisis, it confirms that we will be looking at a record-breaking deficit this year.

This is money well spent. As we explained in our recent report on the fiscal outlook, the biggest risk for the public finances from the pandemic is not the debts built up in the acute phase of the crisis, but the extent of the bounce back during the recovery phase.

As our report illustrated, if the economy is permanently 3 per cent smaller as a result of coronavirus, this would put the national debt on an ever-rising trajectory, while a full recovery would mean the crisis debt burden would melt away as the economy grows. So preventing that permanent damage should be the single overriding priority for the Treasury. Don’t ask ‘can we afford it?’ (yes). Do ask ‘is the Chancellor doing enough?’ (probably not).

Figure 1 – If the size of the economy is permanently reduced, debt stabilises only at a high level

What’s missing on the employment crisis?

There four tasks involved in tackling the unemployment crisis to come: supporting existing jobs, mopping up labour supply, activating the unemployed, providing jobs guarantees for young and long-term unemployed people. How does the Government’s package measure up?

1. Supporting existing jobs – demand-side support isn’t enough

This is a fiscal statement that assumes the pandemic is over and that’s a mistake. On the assumption that the acute phase of the health crisis is over and we’re now into the recovery, the chancellor has focused extensively on demand-side incentives through the targeted £4bn VAT cut for the hospitality, accommodation and attractions.

The eye-catching ‘Eat out to help out’ discount scheme is cleverly targeted at diners eating on Monday to Wednesday only. What matters less here is the scale of the money involved (it could end up pumping much less than £500million into the sector), than the behavioural impact it triggers. Having scared everyone into staying home since March, the Treasury’s goal is to get people comfortable with being out and about once again to stave off a slump. Whether it’s wise to be paying people to go to restaurants with coronavirus on the prowl remains to be seen.

This is a necessary part of the package but it’s probably not sufficient in a world where the risk of further spikes in infections is very real. The £1,000 Job Retention Bonus effectively represents a sharp tapering-off of the furlough scheme at much lower levels of support. This is likely too soon, but what’s more concerning is the lack of allowance for the hardest hit sectors or areas of the country – something where much more flexibility is needed.

As we’ve seen from Melbourne to Leicester, it is highly likely that we will see more local lockdowns in the coming months as we try to keep the virus under control. The prospect of a further hiatus in business, but this time without the support of the furlough scheme, or government grants and loans, is likely to weigh heavily in the balance for employers as they decide whether or not to lay people off or cease trading entirely. To staunch the loss of jobs from this uncertainty, the government should be planning to put in place a ‘geographically flexible furlough’ scheme, as we proposed last week, to give employers confidence that the government has got their backs through any local flare-ups.

2. Soaking up labour supply: more needed

As well as supporting existing jobs, the government needs to focus heavily on slowing the inflow of young people out of education and into an inhospitable labour market. Past experience shows that graduating into a weak labour market can permanently damage lifetime employment and earnings prospects. With a cohort of up to 800,000 young people about to leave schools, colleges and universities as the academic year ends, an expanded apprenticeship scheme, and 30,000 trainee scheme places does not appear to be an adequate response.

The government should be thinking urgently about two dimensions of its response: first about how to encourage employers to share jobs where possible to reduce the unemployment surge, and second about how to keep everyone who can on in education.

On job sharing, as Paul Gregg has suggested, there is clear scope to reform the furlough scheme to be a flat-rate, per-employee grant, that would incentivise employers to keep two people on part-time rather than firing one of them.

On education, for graduates at least, given the crisis facing universities as incoming students look to defer the start of their course, these is surely capacity to accommodate those who could be encouraged to stay on.

The announcement of an extra £2000 for companies for each apprentice they hire under the age of 24 and £1500 for older trainees will incentivise firms to take on more apprentices. However, Treasury fine print indicates a ceiling of 100,000 new places covered by the subsidy, just over a quarter of the number of apprenticeship starts in 2017/18 and one eighth of the school and college leavers coming into the labour market as the academic year ends. Moreover, it’s worth noting that the tendency since the apprenticeship system was reformed in 2017 has been for firms to increasingly use it to improve the skills of existing workers, rather than take on new hires, so question marks hang over the likely uptake of this new hiring-focused version.

To get the most out of the apprenticeship system, the government should also reframe apprenticeship standards to encourage training in the most valuable skills (e.g. Green jobs) and enable progression to higher qualifications once the labour market starts to recover. It should also change the rules to allow firms to use apprenticeship money to retrain existing staff to take on new roles. Further Education colleges, which are badly under-resourced, will need to be funded properly.

3. Activating the unemployed: good

One of the most important things we’ve learned about preventing long-term damage from recessions over the past 40 years is the importance of having employment services to help people keep looking for work even through the darkest days of unemployment. The 1980s recession is a cautionary tale of what happens when job search support is discontinued and it’s vital that we don’t go back there again this time.

Unfortunately, after the cuts of the past decade, Jobcentre Plus capacity is substantially lower than it was at the start of the last recession. The Learning and Work Institute and the Institute for Employment Studies estimate that there is a shortfall of at least 7,000 Jobcentre Plus staff to meet the need. So it’s very welcome that the Chancellor has announced plans to recruit a further 4,500 staff by October and 9,000 more after that.

4. Support for unemployed young people and jobs guarantees: good

Heavily trailed is the government’s plan to dust down Labour’s Future Jobs Fund intervention from 2009, to guarantee young people work. This was an effective policy last time that was estimated to have yielded a net social benefit of nearly £8,000 per participant, and substantially increased the chances that participants were off benefits and in work years later.

The Treasury’s £2.1bn ‘Kickstart’ scheme, aiming to provide guaranteed six-month jobs for around 300,000 young people at risk of long-term unemployment is the right step. As a significantly larger scheme than the 2009 version, the challenge will be in getting enough employers involved.

Green Homes Fund - Insufficient Ambition

The Chancellor’s pledge of £2bn for home energy is a significant improvement on previous attempts like the Coalition’s Green Deal, which amounted to only £240m over four years. But this is still a tiny part of the challenge. The Conservative manifesto promised £9.2bn to improve efficiency in homes, schools and hospitals. Today we are getting just one third of that. All eyes will be on the 'real' Budget in the Autumn

Put in the context of the wider decarbonisation challenge it’s even less impressive. The CCC puts the cost of full retrofits at £26,000, others up to £40,000 per home – the Chancellor’s offer - £5000. Properly retrofitting all 28 million homes in the UK would therefore require hundreds of billions. But 2030 targets don’t require that level of intervention, targeting the five per cent of homes in energy bands F-G would cost closer to £40bn. Either way today’s package of £2bn is small beer.

There are also questions about how well targeted the policy will be. The private rented sector accounts for 20 per cent of UK households, but it has the highest proportion of non-decent homes, with a quarter failing to meet the Decent Home Standard. Renters are less likely to have central heating, insulation, efficient boilers or smart meters than homeowners. This is the lowest of low-hanging fruit. But while the scheme appears to be open to landlords, it's tenants who would benefit from cheaper bills. The low-quality of rental stock already shows the difficulty in incentivising improvements for landlords. With the rental market an acute failing of the previous Green Deal scheme, government need to do much more thinking on encouraging uptake in the private rented sector.

According to the CCC home energy use needs to fall 24 per cent by 2020. With housing emissions already rising before the pandemic, action is even more pressing with the lockdown keeping people home. Half of employees worked from home in April compared to five per cent before the crisis – with nine million furloughed employees also at home. The CCC has pointed to this as a huge opportunity and incentive for families to improve their home energy efficiency. Those who work from home are normally better off and have higher carbon emissions. Those otherwise at home – be they unemployed or on furlough – live in lower quality housing and benefit more from lower bills and healthier homes. The key is ordering, government should frontload support to social housing whose need is more pressing, stimulating supply that will lower costs for higher emitters in the medium term. This will also be crucial to building the market, allowing firms to recruit and train as more households come on board.

Emissions from homes were rising even before the pandemic and have grown even more during lockdown

Finally, Stamp Duty Cut – Morally Questionable

In time-honoured fashion the Chancellor is seeking to pump up the housing market to get the economy moving again. What could possibly go wrong?

But as ever, stamp duty holidays are a bit of a sleight of hand designed to tempt would-be buyers into a falling market with an illusory bribe. As any economist will attest, while house buyers are legally obliged to pay stamp duty, when its temporarily cut that gives sellers the opportunity to charge more than they otherwise would have. The buyer might think they’re getting a bargain but they’re not. That fact will grate all the more if it causes a rush of buyers who subsequently find themselves in negative equity as the economic pain deepens and prices fall. There are surely more morally defensible and socially valuable ways of boosting the economy than this

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