Chancellor of the Exchequer Rishi Sunak set out his plan to rescue millions of jobs and businesses from a winter crisis as the coronavirus pandemic again threatens to derail the U.K. economy.
In an emergency statement to Parliament, Britain’s finance minister announced:
- A six-month “Job Support Scheme” to subsidize the wages of people in part-time work
- Extended loans for companies hit by Covid restrictions, with extra flexibility for repayments
- An extended reduction of value added tax to 5% for the hospitality and tourism industries
- Fresh support for the self-employed
But economists -- and the chancellor himself -- warned Thursday’s package won’t stop a wave of redundancies when the current more generous support program ends. The measures also continued to exclude a swathe of self-employed people who fell through the cracks of support programs rolled out at the start of the pandemic.
Sunak painted a bleak picture of the impact of Covid-19, saying the disease and restrictions are likely to last for at least the next six months. While the Treasury’s primary goal remains to protect jobs, he said, the methods of doing so “must evolve.”
“Our economy is now likely to undergo a more permanent adjustment,” Sunak told the House of Commons. “I cannot save every business, I cannot save every job. No chancellor could.”
Big Jump
U.K. unemployment was already rising during the furlough program
Source: Office for National Statistics
Sunak scrapped his plan for a full-scale budget in a sign of the disruption and uncertainty the resurgent virus threatens to bring to the country. Prime Minister Boris Johnson imposed fresh curbs on the public earlier this week and warned further measures may be needed in what is likely to be six difficult months ahead.
The centerpiece of Sunak’s announcement was a new jobs support program to succeed the furlough policy that ends on Oct. 31 and has supported more then 9 million jobs at a cost of 39 billion pounds so far.
Under the furlough program, the government paid people who were unable to return to their workplaces because of Covid restrictions as much as 80% of their wages.
The replacement policy will pay subsidies to workers who are able to return to their jobs for at least a third of their normal hours. Their employer will pay the hours they work, and the government and employer will each pay a share of wages for the hours they don’t work to help top up their earnings.
It means that workers on the new program will be guaranteed at least 77% of their normal wages. But it also means employers could be on the hook for 55% of wages for an employee working just a third of their normal hours.
“You can’t wave a magic wand and unemployment will stop rising anymore,” Philip Shaw, chief economist at Investec Bank Plc, said by phone. “The measures are a sensible middle ground for the government to prevent the economy falling off a cliff.”
“The sources of our economic growth, and the kinds of jobs we create will adapt and evolve to the new normal,” Sunak said.
The chancellor promised to extend grants to the self-employed “on similar terms and conditions as the new jobs support scheme.”
Sunak also deferred the deadline for new applications to a set of government-backed loan programs until the end of the year, and said loans could be repaid over 10 rather than six years. More than a million of the smallest companies taking out “bounceback loans” can now choose to make interest-only repayments and suspend payments altogether for up to 6 months, he said.
Mounting Debts
U.K. firms have taken out almost 60 billion pounds of state-backed loans
Source: U.K. Treasury
There was extra help for businesses such as pubs and restaurants, which are required to close at 10 p.m. from Thursday. With millions of workers at risk of losing their livelihoods if the crisis worsens, Sunak extended a VAT cut for the industry that was due to end Jan. 12 until the end of March. That means VAT will remain at the reduced rate of 5% rather than 20%.
Half a million other businesses which deferred 30 billion pounds of VAT payments until March will now be allowed to spread them over 11 repayments, with no extra interest.
Damage Limitation
Sunak’s measures aim to prevent a gradual increase in job losses from snowballing into a crisis comparable to Margaret Thatcher’s time as premier, when unemployment climbed to almost 3.3 million as the economy went through a painful overhaul. His actions will likely be followed by the Bank of England, which is widely anticipated to deploy another round of monetary stimulus as early as November.
Economists expect the latest restrictions on businesses to damage the economic rebound. If the government goes further and imposes blanket lockdown restrictions for two weeks at the start of October, output would shrink 3.9% in the fourth quarter, according to Bloomberg Economics.
Sunak and Johnson are trying to strike a balance between getting Covid-19 under control and keeping enough of the economy open to avoid damaging mass redundancies. The first peak of the disease earlier this year hit the U.K. with the highest death toll in Europe and the country’s deepest recession in more than a century.
Johnson’s government has faced mounting criticism over its public health response to the outbreak and is under political pressure to do more to help avoid an economic nightmare as the disease spreads rapidly again.
— With assistance by Andrew Atkinson, and Fergal O'Brien
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September 24, 2020 at 05:56PM
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