On 11 September 2020, the Treasury Committee published its Eighth Report of Session 2019–21, (HC 271). On 3 November 2020 we received the Bank of England’s response to the report, and on 16 November 2020 we received the Government Response, both of which are appended below.
Thank you for sending a copy of your recent report Economic impact of coronavirus: the challenges of recovery. This letter constitutes HM Treasury’s response on the broad range of issues mentioned in your report.
Throughout this crisis, the government’s economic priority has been to protect people’s jobs and livelihoods. The government has spent over £200 billion to protect jobs and businesses. Since the publication of your report, the Prime Minister has announced new national restrictions that will prevent further spread of the virus.
In response to these restrictions, the government is extending a generous and broad ranging support package for individuals and businesses. This includes:
On your recommendation regarding extending the generosity and accessibility of Universal Credit, the government has also been supporting individuals through enhanced welfare provisions, as noted in your report. The £20 increase in the standard Universal Credit award will continue until April 2021. The government has also put in place a substantial package of support for those told they must self-isolate, including enhanced Statutory Sick Pay and the Test and Trace Support Payment, for those in employment or self-employed on low incomes who are told to self-isolate and who cannot work from home.
Our economic support package is one of the most generous in the world. Despite this, we recognise that no government can fully alleviate the hardships of this pandemic. We remain alert to the needs of people and stand ready to adapt our approach to match the situation.
In relation to your comments on recapitalisation of SMEs, the government has always been clear the private sector should be the first port of call for any business looking to refinance or restructure their debt. The government welcomed TheCityUK’s Recapitalisation Group report on supporting businesses through the economic recovery as a useful contribution to discussions on how businesses can be best supported through this difficult time. Whilst we have considered their proposals, alongside similar suggestions in your report such as contingent tax liabilities and student loan type structures, we remain of the view that accredited lenders, not the government, are best placed to support borrowers repay government-guaranteed loans. The government recognises the creativity and insight that industry brings to these discussions, so we welcome further ideas and initiatives, led by the private sector, to recapitalise businesses.
The British Business Bank (BBB) has also been a key element of the government’s response to the COVID-19 crisis. It has responded swiftly to the economic shock caused by the pandemic and continues to deliver financial support to businesses on an unprecedented scale, alongside other government and Bank of England interventions. The government will consider what lessons can be learnt from this experience in order to inform the next phase of the recovery and beyond. As part of its normal operations the government has also always considered providing support to strategically important companies that can reasonably be expected to have a long-term viable future, and whose failure or distress could cause disproportionate harm to the UK economy or society. Companies must have exhausted all other options before being considered, and any support given is on terms that protect the taxpayer, with existing lenders and shareholders expected to contribute to, and share in, the financial burden. Companies receiving support also need to agree to appropriate conditions, including those relating to tax, supplier payment terms, climate change and corporate governance.
On your comments on the Kickstart scheme, I would highlight that gateway organisations, who collect bids on behalf of employers who require fewer than 30 roles, play a vital role in ensuring smaller employers find the Kickstart process easier to manage. DWP implemented a new system to allow organisations to register with the government and be included in an online list of Kickstart gateways. To date almost 500 organisations have registered as gateways, including The Federation of Small Businesses. The FSB’s National Chairman Mike Cherry said, ‘We have successfully worked with the government to develop the new Kickstart Scheme, and help small employers be part of the solution.’ As the Kickstart scheme is rolled out, the government will continue to respond and adapt to ensure it delivers the greatest impact for employers and young people.
On your suggestion regarding pandemic insurance cover, HM Treasury is working closely with insurers, trade bodies and the regulators to understand what more the sector can do to help businesses and support the immediate economic recovery, as well as to learn lessons for potential future pandemics. HM Treasury also remains in close contact with the Prudential Regulation Authority following the test case judgement to monitor the solvency of the insurance sector and will take all necessary steps to maintain financial stability.
With regards to your recommendation on levelling up, the government is committed to levelling up opportunity in every region and nation of the UK and levelling up represents a common priority across departments, both in what they do and how they do it. For example, the government intends to establish a new approach to link departments’ spending proposals to the outcomes they intend to achieve as part of a new Public Value Framework (PVF). HMT announced at Budget 2020 that the government is currently developing the medium- to long-term priority outcomes that it is seeking to deliver for priorities such as levelling-up, as well as the metrics that will be used to measure and improve performance against these outcomes. The government also intends to make decisions differently: for example, we are currently undertaking a review of the Green Book, and at Budget 2020, the Government committed to relocating 22,000 civil service roles from London and the Southeast to the rest of the UK by 2030.
On your recommendation regarding the OBR’s role in monitoring levelling-up, the OBR have a clearly defined mandate, outlined in the Budget Responsibility and National Audit Act 2011. As part of this, the OBR’s responsibilities are examining and reporting on the sustainability of the public finances at a national level although they do undertake work on a sub-national level; they publish devolved tax and spending forecasts alongside each of their main UK forecasts and provide the Welsh Government with independent scrutiny of its forecasts in the Welsh taxes outlook. There have been three reviews of the OBR to date, all of which have recommended caution be exercised in considering the expansion of the OBR’s mandate. The OECD Review published in September 2020 highlighted mission creep as one of four ongoing and potential risks for the OBR, highlighting how additional responsibilities could change the character of the OBR from the focused and agile institution it currently is.
The Bank of England’s network of agents provide the Monetary Policy Committee (MPC) with a view of economic conditions and prospects across the UK. This helps inform the MPC’s decisions in order to achieve price stability for the UK as a whole (measured by the 2% CPI inflation target). The remit of the MPC is set by the Chancellor and is reaffirmed yearly. Subject to achieving the primary objective of price stability, the MPC’s remit also requires it to support the government’s economic objectives for strong, sustainable, balanced growth, which includes levelling up opportunity in all regions of the UK.
On your recommendation concerning international support, I can assure you support for the most vulnerable countries suffering from the devastating health and economic impacts of the pandemic remains a key focus for the UK government. We have committed over £1 billion of UK aid so far, including £306 million to build resilience in vulnerable countries. The UK government championed the development of the Debt Service Suspension Initiative (DSSI) through the G20 and Paris Club of official creditors. This landmark initiative has to date made available around an additional $5 billion to requesting low-income countries so they can focus resources on their coronavirus response, and has been extended for a further six months.
With regards to UK support for the IMF’s response to COVID-19, I strongly agree with the importance of ensuring the IMF has sufficient resources to respond to the crisis. The IMF has confirmed that it is currently adequately resourced, with a total lending capacity of about £1 trillion and resource demands will be kept under review. The government has recently passed legislation to increase the UK commitment to the IMF’s resources by £4.7 billon, in line with a 2019 agreement negotiated amongst IMF members. The UK has also contributed £150 millon to the IMF’s Catastrophe Containment and Relief Trust (CCRT) which provides debt relief to the world’s most vulnerable countries, and has committed a new additional £2.2 billion loan to the IMF’s Poverty Reduction and Growth Trust (PRGT), providing the IMF with additional concessional lending capacity to support low-income countries. I agree with the committee on the importance of ensuring rapid and equitable global access to safe and effective COVID-19 vaccines, treatments, and diagnostics, including for emerging economies. The UK has led the way globally, pledging £1 billion of UK aid to end the coronavirus pandemic as quickly as possible, including the £500 million the Prime Minister announced at the UN General Assembly which supports low and middle-income countries access to any eventual COVID-19 vaccines.
On your recommendation about setting out a roadmap towards fiscal sustainability, given the unprecedented circumstances, it is right that the government’s economic response has focused on limiting the extent to which there is permanent damage to the economy, which would lead to higher structural borrowing over the medium-term. Although this will lead to a rise in borrowing and debt in the near-term, with borrowing costs now close to record lows, this is affordable and sustainable. Over time and as the economy recovers, the government will take the necessary steps to ensure the long-term health of the public finances. The government will set out further details on its plans for sustainable and balanced fiscal policy, including a revised fiscal framework, in due course, as the economic and fiscal outlook becomes clearer.
The Treasury is continuing to monitor trends in consumer spending and our economic response will continue to evolve and adapt to ensure the economy gets the support it needs at the right time. On your comments on the Treasury’s role in monitoring and evaluating the reskilling programmes, we agree that we should evaluate the effectiveness of schemes that have been put in place, and we will be putting in a framework for gathering evidence and evaluating programmes as part of the Spending Review process.
On your recommendation on publishing an updated version of our COVID-19 distributional analysis (published alongside Plan for Jobs), we have taken note and will consider doing so at an appropriate point. The modelling underpinning this analysis was designed to illustrate the extent to which cumulative government measures are mitigating falls in incomes across households of different income levels. It would be very challenging to produce this analysis to the same quality across a range of wider characteristics. Firstly, many of the characteristics we are interested in are held by individuals (e.g. gender), whereas government support, and living standards more generally, tend to be determined at household level. On gender, for example, the Institute for Fiscal Studies have said “because most people live in households with others, and we don’t know how incomes are shared, it is very hard to look at effects separately for many men and women.” Secondly, even where assumptions on income sharing within households are less important (e.g. for regional breakdowns), data availability and survey sample sizes can limit how meaningful and representative these results are, concealing a very wide range of outcomes within broad averages. With regards to the recommendation to “include a breakdown of how unemployment rates of these different groups have been impacted by the crisis”, the Office for National Statistics already publish labour market data by various protected characteristics, including gender, age, ethnicity and disability.
Finally, on your recommendation on the Treasury’s relationship with the OBR and its role in macro-forecasting, the OBR produces independent forecasts for the Government. The Treasury does not produce forecasts for the economy or public finances. The Treasury and the OBR jointly maintain and develop a large-scale macroeconomic model, and the arrangements are set out in a Memorandum of Understanding. Beyond this, policy advice to Ministers covers the economic context, including the sectoral and regional dimensions, and draws on official ONS data and official forecasts (by the Bank of England and OBR), as well as external forecasts, to give Ministers a sense of the possible range of impact of the policy measures being considered. In looking at the economic impact on particular sectors, we draw on information provided by the relevant departments.
Thank you again for sending through your comprehensive report on the recovery from coronavirus. In this letter, I hope to have addressed your key recommendations with the actions that the government has taken and continues to take. I have described the government’s work to protect jobs, our continued increased support for individuals, the comprehensive support we’ve provided to businesses of all sizes, our continued commitment to levelling-up, and that the government continually acts with fiscal responsibility at the heart of its actions.