Economic impact of coronavirus: the challenges of recovery Contents

Conclusions and recommendations

Recovery of consumption

1.In the first half of this year the UK suffered its worst recession in modern history. The latest GDP figures suggest a bounce back has begun. But the path of the economy does not only depend on the course of the virus and Government restrictions or lockdowns, but on how the population views the risk from the virus and their job security, and how that in turn impacts on consumer and business confidence. Combatting the virus is an economic as well as a health priority. (Paragraph 31)

2.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. The Government has to contain the virus as best it can, but at the same time it has to boost consumer confidence and job security without causing the virus to spread—this is a difficult balancing act. The outlook for the economy remains exceptionally uncertain. Some level of economic scarring is now almost certain. (Paragraph 32)

3.The Chancellor was right to begin stimulating consumption at the time of the Chancellor’s Plan for Jobs, especially in the hospitality and tourism sector, to ensure these businesses, often reliant on summer months, did not start cutting jobs. However the Eat Out to Help Out Scheme has now ended and the continued VAT cut on hospitality and leisure may not be enough to encourage consumers to continue to spend as the threat of the virus continues and they face rising job insecurity. The Chancellor needs to consider whether additional measures to stimulate consumption are warranted at the next fiscal event. (Paragraph 42)

Avoiding long term unemployment

4.We believe the Chancellor was right to start measures to combat long term unemployment in July. Rising unemployment becoming structural and permanent is a critical risk arising from the crisis. (Paragraph 58)

5.As the crisis moves beyond full lock-down, it is important to effectively target assistance to those businesses and individuals who need it. The ability of labour to move from sector to sector will not be a painless process and will be dependent on the growth of sectors matching the shrinkage of sectors. The Government should set out how it will manage the transition to mitigate the crisis and prevent exacerbating further inequalities that undermine the “levelling up” agenda. (Paragraph 59)

6.A large proportion of businesses in sectors such as hospitality and leisure that are suffering most from social distancing may still have a viable long-term future at the end of October. It is not clear to us that the Job Retention Bonus, which all businesses are eligible for, is value for money, given that most of the funds will be spent on workers who would be retained anyway. The Chancellor needs to carefully consider whether a targeted extension of the CJRS and/or other targeted support measures might be required and to explain his conclusion. (Paragraph 60)

7.It is vital that workers made redundant have the opportunity to reskill. We heard evidence that the poor reputation of schemes in the 1980s actually reduced participants’ employment prospects. Even though the Treasury is unlikely to be responsible for delivering vocational or reskilling schemes, given the role of these schemes in reducing long term unemployment, we recommend that the Treasury ensures that their quality and reputation is monitored. We recommend an evaluation of these schemes every six months afterwards to assess whether they genuinely increase job prospects. (Paragraph 61)

8.The Government also needs to make sure that the requirement for employers interested in offering fewer than 30 Kickstart roles to apply through a representative organisation does not make the scheme inaccessible to SMEs and charities. (Paragraph 62)

9.The crisis has hit different groups of people unequally. It is also likely that the differences in hours of paid work carried out between men and women observed during the lockdown may lead to a widening of the gender pay gap, especially if the differences in hours worked persist in the months ahead. We recommend that the Treasury publishes an updated version of its distributional analysis in the Plan for Jobs in the next fiscal event, alongside an equality impact analysis of how the recession is impacting different groups (e.g. gender, race, region and socioeconomic status) and the extent to which Government measures are mitigating falls in incomes for those hardest hit. This analysis should also include a breakdown of how unemployment rates of these different groups have been impacted by the crisis. (Paragraph 79)

10.The Government has raised Universal Credit and made it easier to access. However these changes are time-limited for a year. The Government should consider extending the measures increasing the generosity and accessibility of Universal Credit put in place in March 2020. The Government should also conduct a study to examine the adequacy of and eligibility for sick pay, given that poor levels of statutory sick pay will make it harder for workers to isolate when needed. (Paragraph 80)

Corporate debt

11.It remains unclear how the Government expects businesses to pay back loans in the future. The crisis and the lockdown of the economy meant that businesses have largely forgone revenue which many are unlikely to make up in the future and revenue is also likely to be suppressed in some sectors for some time. (Paragraph 100)

12.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. TheCityUK has already carried out a comprehensive review on the recapitalisation of businesses, which should provide a starting-point for the Treasury’s work. (Paragraph 101)

13.The Treasury should evaluate whether there needs to be a new state body or a remodelling of the British Business Bank, to provide loans at speed in a crisis if required, and to also play a part in recapitalising businesses including investing strategically in large businesses. (Paragraph 110)

Longer term challenges

14.One legacy of the crisis will be a sharp rise in the level of public debt and, possibly, an ongoing rise in borrowing. This has been and will be necessary to contain the economic damage from Coronavirus and does not raise immediate debt sustainability concerns. However, it will make the job of stabilising the public finances in the long term more difficult. (Paragraph 121)

15.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 like to stifle economic recovery. A reassurance that the Government intends to take steps to ensure fiscal sustainability in future will underpin market confidence and reduce uncertainty for households and businesses that may fear immediate tax rises. (Paragraph 122)

16.In order to prevent “levelling up” becoming an empty slogan, the Government should produce a strategy underpinning it that defines clear objectives and includes the indicators it will use to gauge success at the next fiscal event. The Government needs to clarify whether it is planning to close the productivity gap, the income gap, the gap in health outcomes, the gap in educational outcomes or all of these. It also needs to define the strategies it will use to close different imbalances: strategies to close productivity gaps may well be different to those aimed to close income gaps or those gaps in health outcomes. (Paragraph 133)

17.We welcome initiatives by the ONS to improve the quality of its regional data, for instance by producing quarterly regional GDP figures. The Treasury publishing regional data in its March Budget is also a good first step towards increasing the profile of regional data. Such data will be vital in the wake of the crisis to assess the impact on different regions and sectors. While the OBR’s and Bank’s remits are primarily national, showing regional variations can enrich users’ understanding of the economy and enable policy makers to better understand the differentiated impact of the coronavirus on various regions and sectors of the UK economy and how best to implement and measure the Government’s “levelling up” strategy. (Paragraph 138)

18.The Treasury and the OBR should consider raising the profile of regional data in their publications. We also recommend that the Bank of England develop their datasets from their Regional Agents network and Decision Maker panel and endeavour to highlight disparities in regions in their publications. We recommend that the Treasury also review the remits of both the OBR and Bank in the next year to see whether they need changing to reflect the Government’s “levelling up” agenda. (Paragraph 139)

19.We call on the Government to throw its diplomatic weight behind the global community in investing in public health systems in developing countries; ensuring that testing, treatment and a vaccine when developed is made as widely available as possible to emerging economies. The Government should also consider increasing the resources available to the International Monetary Fund, should it be needed to maintain countries’ international financing in the event of renewed market turbulence or further waves of the virus. (Paragraph 153)

Overall approach

20.Local authorities are critical in responding to local outbreaks effectively. In the forthcoming Spending Review or budget process, local government spending must not be treated as a residual and must be costed based on the submissions put forward by local authorities. (Paragraph 165)

21.The Government should as soon as possible set out in a public document the type of support available to local authorities in the event of a localised lock-down and how it will work with local authorities to support local businesses. (Paragraph 166)

22.It is too simplistic to say that a compulsory lockdown is a trade-off between the people’s health and the economy. The very presence of the virus, and how people respond to it regardless of what the Government mandates, has an economic impact. And lockdowns don’t just affect the economy—they have health implications as well, positive and negative, beyond just combatting coronavirus. (Paragraph 170)

23.When it imposes and removes social restrictions, the Government needs to be as clear as possible that a) there are harms in restrictions and there is a trade-off between these harms and the harms of the virus spreading; and b) how they have made that balance, recognising this is going to be a matter of judgment. (Paragraph 171)

24.It is notable that the synchronisation of the OBR’s analysis and the Government’s announcements appears to have been challenged in the crisis. The OBR scenario analysis undertaken in the Fiscal Sustainability Report did not include the Government’s measures in its Plan for Jobs announced just a week before. This could be because the crisis requires a rapid policy response, which means that it was not always possible to inform the OBR of policy announcements in the normal working timetable. (Paragraph 176)

25.We suggest that by the next fiscal event the Treasury clarifies its relationship with the OBR, in particular what the process is for declaring a Treasury announcement to be a fiscal event requiring an OBR economic and fiscal forecast. (Paragraph 177)

26.The Treasury’s macroeconomic forecasting ability appears to have eroded since the formation of the OBR. The Treasury needs to maintain sufficient forecasting capacity outside the OBR so that it can ensure that it can adapt policy responses rapidly to an urgent situation. In its response to this report, the Treasury should explain in detail its short-term macroeconomic forecasting capabilities, and how macroeconomic forecasting analysis has informed the design, scope and scale of its interventions during the crisis. (Paragraph 178)

27.We are concerned about the implications of the pandemic for insurance, given that businesses will need the confidence that insurance cover provides if they are to resume normal activities. (Paragraph 184)

28.The Treasury should consider whether Government intervention is required to support the insurance industry in finding a solution for pandemic insurance cover; and whether such support would be an effective use of public money. We also recommend that the Treasury investigates whether it needs to mitigate the risk of insolvencies in the insurance sector, should the Court’s ruling find in favour of policyholders. (Paragraph 185)

29.The Government must be willing to be flexible, even on manifesto commitments, in response to the crisis. Lifting the Triple Lock on pensions next year is a sensible proposal and should be carefully considered. (Paragraph 189)

30.One of the clear strengths of the Treasury’s response in the initial stages of the crisis has been its willingness to listen and adjust its policies in response to feedback. However, we are disappointed in its refusal to implement recommendations from our first Report and hope that this does not indicate growing intransigence going forward. The continued uncertainty about the virus and the impact on economic recovery means that the Chancellor must show continued flexibility in his measures. (Paragraph 193)

Published: 11 September 2020