Policy Measures to Help Growth

The UK economy is recovering. The unlocking will contribute to a significant rebound in coming months. After a swift but severe recession in the first half of the year the economy will likely grow at a solid pace over the second half of the year and at a steady pace in 2021.

Despite this, it will not be until the end of next year that the size of the UK economy will return to pre-crisis levels and, even then, unemployment will be higher than earlier this year.

V may seem more like U

Thus, even though the rebound in GDP is consistent with the idea of a V-shaped economic recovery, it may be wrong to describe it as that. For, after a swift but severe recession, the economy will not rebound quickly to where it was before the crisis. Instead – in the vaccine gap phase some vitally important sectors like the arts, creative firms, the hospitality sector and tourism will be in severe difficulty – while in addition, unemployment will be higher, with permanent scarring as some lose their jobs because of this crisis. Given all this, it may feel more like a U-shape.

Even when a vaccine is found and the economy has recovered, the policy aftermath of record low rates and high public debt will need to be addressed. There is also the uncertainty about the outlook for inflation as we emerge from this crisis.

For now, though, the immediate challenge facing the economy and policymakers is to limit the rise in unemployment and to help ensure both a recovery in demand and a restoration of supply potential.

A focus on building, and levelling up

Last week the Prime Minister focused on build, build, build. The message being that the economic crisis is now centre-stage alongside the health crisis, that the Government has ruled out austerity and is favouring capital investment, and that it is taking advantage of low rates and higher returns to invest. Also, the pre-crisis agenda of levelling up remains centre-stage.

Of course, while the current environment of low inflation, rates and yields justifies the present stance of higher borrowing as opposed to austerity or tax increases, the Government needs to have a clear, credible plan where it can reduce the debt burden. Ideally this is tackled through stronger economic growth.

This week the Chancellor will outline plans to emerge from the first stage of the crisis. Creating an economic environment to support jobs with measures to help recovery and also providing specific targeted, timely and temporary help where needed will be the main focus.

These specific measures are already set to include welcome, direct support to the arts and creative sector. The vaccine gap and social distancing means large swathes of the arts – as well as other sectors – won’t be able to return to business as usual.

Significant risks for jobs remain

There are significant upward risks to unemployment, despite recovery. There are three risks to the jobs outlook: as the government schemes are phased out; as sectors are impacted by the vaccine gap; and, often overlooked, as the debt overhang weighs on firms and recovery next year.

The government schemes are helping 8.9 million on the job retention scheme and 2.6 million self-employed and are phased out later this year. Also, the Treasury and Select Committee recently called for action to help the large group of people who do not qualify for the present Government schemes for a combination of reasons. The size of this excluded group could be between one and three million people – from freelance workers to those who changed jobs just before the crisis began or small firms that do not meet the criteria needed for existing schemes.

Tax cuts may also figure this week, such as cuts in VAT to help demand, reductions in stamp duty to help kick-start the housing market, or reductions in national insurance to help the jobs outlook. The Chancellor might also wish to consider a coronavirus recovery fund, helping support firms as we emerge from this crisis. At its core is the aim to provide equity, not debt, to firms.

Overall, to be fully successful, the UK needs a three-arrowed approach to Government policy.

The first arrow is credible fiscal activism. This not only justifies fiscal policy doing more of the heavy economic policy lifting in this crisis, but it also necessitates a credible plan of action to reduce the ratio of debt to GDP gradually over time. Creating fiscal space will be an important feature of the Chancellor’s comments this week, and will be followed later this year with a comprehensive spending review and the annual Budget.

While low rates allow the government to borrow, a high stock of debt will leave it vulnerable to any change in economic circumstances. This highlights the importance of having a credible fiscal plan, not focused on austerity or tax hikes, but tax cuts and creating a pro-growth environment.

The second arrow, linked to the first, is monetary and financial stability. Consistency is needed between monetary and fiscal policy. I would also advocate a money GDP target. The Bank recently opted to ease further through a further £100 billion of Quantitative Easing, which I thought they should have held off on. Policy rates look set to remain low for some time.

The third arrow is supply-side measures, particularly including incentivising the private sector to invest, innovate and grow.

Overall, I do not think this is the time to become pessimistic about the UK or the global economy. However, it is appropriate to recognise the considerable near-term uncertainty and in this context to expect the policy stimulus to continue here in the UK. It is against this background that the Chancellor unveils his latest economic statement this coming week.

This outlook for the UK is also consistent with a recovery in the world economy that has already begun and where global interest rates are now at record lows and global public debate at record highs. We have witnessed both a health and economic crisis, and as we exit from both the outlook will improve – both here in the UK and globally.

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