Here's What Rishi Sunak Could Do to Stimulate the UK Economy – BNN

(Bloomberg) —

As evidence mounts of the economic destruction being wrought by the coronavirus pandemic, U.K. Chancellor of the Exchequer Rishi Sunak is examining ways to get consumers and businesses spending once again.

The economy shrank by a fifth in April, jobless claims have doubled to almost 3 million and the national debt is now above 100% of economic output for the first time since 1963 as the vast cost of government efforts to save jobs and livelihoods piles up.

But with the virus apparently in retreat and the lockdown in place since March gradually easing, Sunak is preparing to shift the focus to reviving the economy with the announcement of modest stimulus measures next month.

With ministers wanting more time to fully assess the damage before announcing commitments, the package won’t amount to a mini-budget, according to a person familiar with the plans. The initial stimulus is likely to be focused on infrastructure and jobs.

The calculation is that household and firms will be unable to take advantage of major tax and spending giveaways until the economy has returned to a semblance of normality. A full Budget due in the fall will provide an occasion for more sweeping stimulus. Here are some steps Sunak could take in the meantime:

Infrastructure

The ruling Conservatives pledged in their election manifesto to spend 100 billion pounds ($126 billion) on infrastructure over the next five years, and Sunak in his March budget announced 27 billion pounds of investment in roads and 5 billion pounds to get gigabit-capable broadband to hard-to-reach areas.

Accelerating that spending and bringing forward other projects that have been in the planning for years could help fire up the economy.

“There are a lot of infrastructure programs that have been on the books for donkey’s years and they are shovel-ready: get on with them,” Adam Marshall, director general of the British Chambers of Commerce, said in an interview.

Skills

With millions of people facing the specter of unemployment as government wage subsidies are withdrawn, training programs are needed to equip them with skills to work in the industries of the future, such as green energy and artificial intelligence. Industry groups are pushing for them.

Ben Fletcher, policy director at MakeUK, a manufacturing lobby, said large factory closures already provide a blueprint.

“When a big site loses several thousand jobs, there is a retraining program, usually the local further education college gets involved, the company gets involved, the local authority gets involved,” he said. “That is something really critical in the aftermath of the kind of redundancies we are already seeing.”

Capital Allowances

The financial hit inflicted by the lockdown means many companies may be saddled with more debt and reluctant to invest in new machinery. Sunak could encourage them to invest by increasing and extending capital allowances.

One program, the Annual Investment Allowance, applies to machinery and normally provides tax relief for the first 200,000 pounds of investment. A temporary two-year increase to 1 million pounds expires in January. Sunak could both increase the ceiling and extend the time period.

Such tax measures, though, may be something for the Budget later in the year. In March, Sunak increased a different annual allowance for companies, enabling them to claim relief for 3% of the cost of investment in non-residential buildings instead of 2%. The cost to the taxpayer is forecast to exceed 1 billion pounds in the coming five years.

Regulatory Easing

Sunak has already cut red tape for business to help them weather the pandemic, including reporting requirements on financial accounts, compliance with gender pay gap reporting, and checks on the right to work of immigrants.

“There’s been a lot of forbearance during the acute stages of the crisis; that can be extended,” said Marshall.

Mel Stride, a former Treasury minister who now chairs Parliament’s Treasury Committee, called on ministers to give businesses, particularly pubs, restaurants and retailers, “a shot in the arm by allowing them to use space outside of their premises.” It’s something the government is actively considering.

Business Rates

Sunak has already given shops and the hospitality industry a 12-month holiday during which they don’t have to pay business rates, a property-based levy that helps to fund local authorities. MakeUK says extending it to cash-constrained manufacturers would be “the single most important measure the chancellor could introduce,” delivering instant relief for companies of all sizes and across all sectors.

VAT Cut

A temporary cut in value added tax, a levy on sales, would be a measure straight out of Labour Chancellor Alistair Darling’s playbook during the financial crisis in 2008.

The rate for most goods is 20%, and the U.K. remains bound by European Union rules — setting a 15% floor — until the year-end, when a post-Brexit transition period ends. That still leaves scope for a cut this year.

Stride said if he were still at the Treasury, he’d be considering it. But he cautioned it can be a “blunt instrument” because there is no guarantee retailers would pass the cut on to consumers, or that crisis-traumatized consumers would spend rather than save the windfall.

The measure would also be expensive: The U.K. tax authority, HMRC, estimates every percentage point drop in VAT would cost the Treasury about 7 billion pounds a year.

Asked in a BBC interview on Sunday whether he might cut VAT, Sunak didn’t rule it out, while suggesting it’s an option for later.

“Before we have that conversation we need to actually reopen those sectors,” he said. “There’s no point cutting VAT on a sector which is actually closed.”

Green Stimulus

Prime Minister Boris Johnson has said he sees a “green” recovery as vital to restoring the economy, and Sunak in March pledged to create “the high skill, high wage, low carbon jobs of the future.” His announcements then included 500 million pounds for electric car-charging facilities and 800 million pounds for carbon capture and storage technology to trap greenhouse gas emissions and pump them underground for permanent storage.

Stimulus efforts could see both of those programs accelerated — including more specifics on the CCS funding, which needs to be apportioned to projects on the ground. The Conservative manifesto also included a 9.2 billion-pound commitment for energy efficiency projects in homes, schools and hospitals, which was absent from the Budget. Efforts to insulate buildings could create jobs, save energy and reduce emissions.

After Germany’s stimulus plan included a 9 billion-euro ($10 billion) bet on developing hydrogen as a clean fuel, the chancellor may be tempted to look at that technology too. The Tory manifesto and the 2020 budget documents both made fleeting references to its potential.

©2020 Bloomberg L.P.

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