Sunak Gambles 30 Billion Pounds on Plan to Save U.K. Economy
(Bloomberg) -- Rishi Sunak set out a 30 billion-pound ($37.6 billion) blueprint to save jobs and inject confidence into the U.K.’s coronavirus-battered economy.
In a statement to Parliament, the Chancellor of the Exchequer announced tax cuts on home-buying and dining out, and a new bonus program for employers who don’t fire their staff.
“We face profound economic challenges,” the Chancellor of the Exchequer told the House of Commons on Wednesday. “In just two months our economy contracted by 25% -- the same amount it grew in the previous eighteen years.”
With a budget due in the fall, Sunak signaled he will take further steps as he promised to do everything he can to save jobs and give families “hope” in the months ahead. The chancellor’s plan included:
- Raising the stamp duty threshold for purchases of property to 500,000 pounds, until March 31 next year. Officials said this will mean nearly 9 out of 10 people buying homes will pay no stamp duty at all
- A six-month cut to sales tax for restaurants, hotels and attractions to 5% from 20%
- A 9-billion pound bonus program to protect workers returning from furlough, with a bonus of 1,000 each
- An “Eat Out to Help Out” government-backed discount on meals in restaurants across the country during August.
Sunak faces a gargantuan task in pulling the world’s fifth-biggest economy out of what may be its worst recession in three centuries. Unemployment is expected to spike upwards as he unwinds unprecedented government programs that are funding the wages of more than 12 million workers. So far, the state has already provided more than 160 billion pounds of support for the economy.
The risk for Sunak is that his gamble on a package of measures to boost business and consumer spending does not work. If prospective home-buyers do not feel confident in their jobs, a cut to stamp duty may not be enough to persuade them to enter the housing market.
If the public are worried about social distancing in restaurants, the promise of a cheaper meal may not get them to book a table. And employers may decide that 1,000 pounds per worker is not enough to offset the costs they face. And if the economy remains stuck as a second wave of the pandemic hits Britain, the damage will be entrenched.
While “not a huge intervention” by recent standards, Sunak’s plan should “help cushion some of the turbulence in the jobs market over coming months,” said James Smith, developed markets economist at ING. “But more importantly, no amount of fiscal support can mask the fact that the U.K. recovery hinges almost solely on avoiding a return to repeated, widespread lockdowns.”
Outlining his proposals on Wednesday, the chancellor said he will not be held back by political ideology, even after calls from some within his party to avoid piling up the nation’s debts.
“Where problems emerge, we will confront them. Where support is justified, we will provide it. Where challenges arise, we will overcome them,” he said. “We entered this crisis unencumbered by dogma and we continue in this spirit, driven always by the simple desire to do what is right.”
He announced a new program to reward employers if they take back furloughed workers and keep them on continuously through the end of January. Businesses will receive a 1,000-pound bonus per employee who returns from furlough in a policy potentially worth 9 billion pounds.
Sunak cut the rate of value-added-tax on food, accommodation and attractions to 5% from 20%. The measure will last until Jan. 12, in what he said was a 4 billion-pound catalyst.
He also announced an “Eat Out to Help Out” discount, offering a 50% price cut on meals at participating restaurants between Mondays and Wednesday in August.
The Treasury also unveiled a 2 billion-pound program to pay the wages of more than 200,000 young workers, bringing to more than 6 billion pounds the value of measures to support jobs and environmental programs announced by Sunak in the run-up to his statement.
That’s in addition to 5 billion pounds of infrastructure spending on schools, hospitals and roads, announced last week by Prime Minister Boris Johnson, who pledged the U.K. will “build, build, build” to emerge from the crisis.
What Our Economists Say:
“Today’s statement looked very much like a stop gap to us. Many of the policies are the usual responses during a recession (Sunak also reiterated Prime Minister Boris Johnson’s commitment to bring forward capital spending this year), but there wasn’t anything that was aimed at turbo-charging the recovery. Sunak is clearly watching how the economy responds as it reopens. If the recovery fails to build on it’s promising start, expect a more significant stimulus package in the fall.”
--Dan Hanson and Niraj Shah. For full REACT
Sunak Tempts Consumers to Eat Out Again With VAT Cut: TOPLive
Bond markets have shrugged off Sunak’s latest largess, which doesn’t stand out in the current climate of high spending. Yields on 10-year bonds fell 1 basis points to 0.17%. Investors are more focused on the Bank of England’s plans for asset purchases and the latest issuance plans from the Debt Management Office, which are due on July 14. Sterling erased gains to trade down 0.1% at $1.2533.
Pub company Marston’s Plc erased an earlier loss to gain as much as 3.5%, while Wagamama restaurant chain-owner Restaurant Group Plc jumped as much as 7.7% before trimming the gain.
Mike Bell, global market strategist at JPMorgan Chase & Co. asset management, said the main risk is unwinding the furlough program before recovery has taken hold, which could result in millions of job losses. “Removing the furlough scheme before activity has recovered is like building three quarters of a bridge and not finishing it because it is becoming expensive,” he said.
Following is a summary of Sunak’s measures, and their costs:
|Job Retention Bonus||Up to 9.4 billion pounds|
|Kickstart Program||2.1 billion pounds|
|Boosting work-searches, skills and apprenticeships||1.6 billion pounds|
|VAT cut for hospitality||4.1 billion pounds|
|Eating out vouchers||0.5 billion pounds|
|Infrastructure spending||5.6 billion pounds|
|Public sector de-carbonization||1.1 billion pounds|
|Green homes grant||2 billion pounds|
|Stamp duty cut||3.8 billion pounds|
|Total||Up to 30 billion pounds|
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