Economic impact of coronavirus: the challenges of recovery Contents

Summary

This is the second Report in our inquiry into the Economic Impact of Coronavirus. The first Report focused on gaps in two key schemes, the Coronavirus Job Retention and the Self-Employment Income Support Schemes, aimed at protecting livelihoods during lockdown. We were disappointed that the Government did not implement our recommendations and that, whilst millions were helped by Government schemes, over a million people are still affected by the significant gaps that remain.

This second Report focuses on the medium term challenges which have emerged as the economy comes out of lockdown, including: supporting the recovery of consumer spending; minimising long term unemployment increases; and dealing with elevated levels of corporate debt. It also looks at issues that will become increasingly critical in the longer term, such as Government debt sustainability.

Consumption is returning following the lifting of Government restrictions. However continued consumer caution around re-engaging with the economy, the prospect of more localised outbreaks and a second wave are dampening a full recovery to pre-pandemic levels of consumer spending, with some level of economic scarring almost certain. The economic impact of the crisis has also been felt unevenly, with a variation between sectors and those in low pay, young people, women, renters and ethnic minorities being particularly impacted.

The Government’s Plan for Jobs, published in July, contained measures to boost consumer spending, such as a VAT cut on the hospitality and leisure sector and the Eat Out to Help Out Scheme. Whilst there is some early evidence that this approach has helped this hard hit area of the economy, it is also the case that ongoing social distancing restrictions are likely to limit the effectiveness of such schemes and consumers, fearful both of the virus and job security, may still be reluctant to spend. The Government has rightly and consistently stated that it will review its approach in the light of changing economic circumstances, and we believe that it is important that it stands ready to take further action to support consumer expenditure and business as appropriate. Whilst the next fiscal event will be an obvious opportunity for further announcements, it is important that the Chancellor reacts quickly to emerging challenges and feels free to make frequent new policy announcements where these are necessary.

The Government faces a daunting challenge in preventing rising long term unemployment while enabling sufficient labour flexibility to allow structural change and movement from shrinking to growing sectors. The Coronavirus Job Retention Scheme (CJRS), which subsidised the majority of furloughed employees’ wages, comes to an end in October. Some sectors suffering most from social distancing may no longer be viable, but many businesses in these sectors will have a viable long-term future, but only if they continue to be supported either by their owners or by taxpayers beyond the expiry of the CJRS. Whilst we recognise that the cost of the CJRS means that the Scheme cannot persist indefinitely, the Chancellor needs to carefully consider whether a targeted extension of the CJRS and/or other targeted support measures will be required, and to explain his conclusion. The Job Retention Bonus Scheme announced in the Plan for Jobs, which gives £1,000 to all businesses for each employee retained up to January 2021, does not appear to be effectively targeted. It will undoubtedly lead to significant deadweight cost, as this support will be claimed for a significant number of employees who would have been kept on anyway.

Supporting high quality training for young people and those who may find it difficult to find new jobs is critical and we welcome the Treasury’s commitments in these areas–the Kickstart Scheme, an Apprentice incentive, more work coaches and skills training. We heard evidence that the poor reputation of schemes in the 1980s actually reduced participants’ employment prospects. We recommend that the Treasury plays a key role in ensuring that the quality and reputation of reskilling and vocational schemes is monitored to ensure they increase employment prospects and provide value for money. The Government should also consider extending the measures increasing the generosity and accessibility of Universal Credit put in place in March 2020 and conduct a study to examine the adequacy of sick pay.

We are concerned that there may be a significant lack of capacity and willingness for the private sector to step in to provide solutions for corporate indebtedness especially amongst small and medium-sized enterprises (SMEs). Viable SMEs struggling with debt will prolong the recession and so the Government must develop solutions for ensuring the recapitalising of their balance sheets. The Government must outline a plan for this within the next three months. It should think creatively (as it has around other support measures) and consider a wide range of potential interventions, such as contingent tax liability or student loan type structures in relation to debt for SMEs, where repayments are conditional on them demonstrating appropriate financial health.

The Chancellor should, at the next fiscal event, set out an initial roadmap of how he intends to place Government finances on a sustainable footing. The milestones on that roadmap will need to be flexible–tax increases imposed too early are likely to stifle economic recovery. The Government may also need to demonstrate flexibility in other ways. It may need to drop its manifesto commitment on the “Triple Lock” on pensions next year in order to address the anomaly arising from the present downward pressure on average wages created by the Treasury’s employment support schemes. The Treasury should also outline how it intends to support local authorities to respond rapidly to local lockdowns in the future.

“Levelling up” needs to be properly defined. In July 2019, the Prime Minister stated his intention was to “to level up across Britain”. And one of the priorities of the Spending Review launched in July 2020 is “levelling up economic opportunity across all nations and regions of the country”. In the next fiscal event, the Government needs to say what this means, and how it will be measured and implemented. We recommend that the Treasury also review the remits of both the Office for Budget Responsibility and the Bank of England in the next year to see whether they need changing to reflect the Government’s “levelling up” agenda.

We are concerned that whilst there have been impressive examples of the Treasury moving at scale, at pace and with imagination to support the economy there are also disappointing signs of intransigence. We are disappointed in the Treasury’s refusal to implement recommendations from our first Report, focused on the gaps in support. The Chancellor told us that he had “drawn a line” under any possibility of changing the schemes. We urge continued flexibility in the Treasury’s approach going forward.





Published: 11 September 2020