Will the nature of the economic crisis require an unconventional response?

Joseph Smith

With the Government turning its attention to the recovery, PLMR’s Joseph Smith examines what this might mean in practice.

The Office for National Statistics (ONS) recently revealed the economic cost of a full month in lockdown with UK GDP contracting by 20.4% in April. In spite of this, thanks to the Government’s Job Retention Scheme, unemployment has held steady at 3.9 per cent, unchanged from the quarter before.

Unfortunately, this is unlikely to continue, as Covid-19’s impact on headline job numbers won’t become apparent until the meaningful phasing out of Government income support in September – when companies start contributing 10% of furloughed staff’s wages. This will be crunch time for many businesses, as their costs will increase without their income reaching anywhere near pre-crisis levels due to social distancing and consumer anxiety. Figures released by HM Revenue & Customs show that over a third of the 8.9m furloughed workers are in retail and hospitality— sectors that risk being unable to operate at full capacity for the foreseeable future. As the effect of this fall in demand starts to filter through, a proportion of those furloughed are likely to see their jobs disappear. Even if 75% were to return – an optimistic scenario – unemployment would increase from 2.2m to 3.5m, reaching an overall rate of around 10.6%, easily surpassing the 8.5% peak experienced after the financial crisis.

The most effective way of mitigating this would be to reduce the social distancing guidelines crippling the hospitality sector. For many businesses, until the 2m rule is revised, incomes will be artificially constrained, making it impossible to justify pre-crisis levels of staff. This is understood by the Government, and the guidance’s reform is arguably a question of ‘when’ not ‘if’.

How the Government responds to the wider challenge is a little trickier to predict. When pushed by the BBC’s Andrew Marr, Sunak cited the “unprecedented” nature of the imminent recession, and said it will require an “unconventional” response, yet what might this mean in practice? Interestingly, when probed on the possibility of cuts to income tax, the Chancellor demurred, arguing that the earnings of those employed had been relatively protected, citing the Job Retention Scheme’s uptake and ONS data showing an increase in savings.

This could suggest that any policy response might be more focussed on the so-called ‘ease of doing business’ as the Government seeks to encourage hiring and reduce the costs of supplying goods and services. With the Chancellor reportedly working on an emergency budget statement, below are a couple of measures that could be on the cards;

Reducing employer’s national insurance contributions (NIC)

NIC contributions represent a significant cost to businesses and arguably reduce the attractiveness of hiring. According to Tony Wilson of the Institute for Employment Studies, they are the single largest non-wage labour cost that employers face – a tax of 13.8% on earnings above £8,788 a year, which adds around £2,400 to the cost of employing someone on an average wage. One option is a threshold increase to £18,000, resulting in no employer NICs for anyone on a minimum wage, whilst halving the cost for those on a median income. Although expensive for the Treasury, a cut or suspension would undoubtedly save jobs by reducing the cost associated with keeping staff on. Having already outlined its ambition to boost skills, the Government could make any reduction conditional on companies investing in training or apprenticeships.

Company debt forbearance 

Since their introduction in late April, the 100% state guaranteed ‘bounce back loans’ have had a huge uptake from small businesses. Although many of the loans won’t be repaid because of company defaults, for any that do survive, the repayment burden risks holding back any economic revival, as shown in a poll commissioned by the Institute of Directors (IoD) in early June. It revealed that 51% of businesses said that debt their organisation had taken on during the crisis would have a negative impact on their recovery, while 57% said it would hold back their investment plans over the next two years as companies prioritise paying the bills before spending on new projects.

As a key driver of growth, the Government will be reluctant to see investment constrained at a time when the economy needs it most. It may therefore want to reduce the repayment burden imposed by these loans, at a cost to the taxpayer. There are a number of ways of doing this, varying in generosity. A single round of complete debt forgiveness would be the most effective, but also expensive. The Government could also waive interest and extend the repayment term. A further option, as proposed by the IoD, is to allow small companies to convert their Covid debt into “student loans”, with repayments kicking in once the business has turned a profit. As well as providing breathing space for smaller firms to invest and grow, the measures above would lower the risk of debt triggered collapses, and as a result, the Treasury’s liability.

Relaxation of Sunday trading hours

As former Chancellor George Osborne alluded to in his recent Treasury Select Committee appearance, giving businesses the flexibility to operate on Sunday could increase footfall at a time when social distancing risks suppressing it. As online retail becomes more dominant, shops with a physical presence are significantly disadvantaged by the current rules. With the need to increase consumer spending also of the essence, allowing businesses to extend their opening hours could facilitate just that. Sunday trading laws were suspended for an eight-week period during the 2012 London Olympics to great success, increasing sales by 3.2 per cent compared with the previous year.

Regardless of policies adopted, having intentionally inhibited economic activity to stop the virus spreading, the Government must now prioritise the recovery. Against the backdrop of April’s record fall in output, Rishi Sunak will be hoping for a resurgence just as unprecedented. With the Autumn Budget fast approaching and the Chancellor expected to announce a suite of measures in the coming weeks, the Government will be particularly receptive to businesses, making it more important than ever to be plugged into policymakers.  

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