ADVERTISEMENT

U.K.’s Sunak Writes Blank Check to Rescue Virus-Hit Economy

U.K. Government to Help Pay Workers Wages During Pandemic

(Bloomberg) --

The U.K. announced an unprecedented stimulus plan to cushion the economic blow from the coronavirus, including paying a portion of citizens’ wages for the first time in the nation’s history.

Chancellor of the Exchequer Rishi Sunak on Friday unveiled what was in effect his third emergency economic package in 10 days as the virus threatens to trigger the worst recession in a century and a wave of mass unemployment.

Workers whose jobs are at risk will see up to 80% of their wages paid by the government, potentially costing at least 10 billion pounds ($11.6 billion.) Companies will also get a 30 billion-pound tax holiday, with the government suspending value-added tax payments for a quarter. Renters and self-employed workers will get some help, too.

U.K.’s Sunak Writes Blank Check to Rescue Virus-Hit Economy
U.K.’s Sunak Writes Blank Check to Rescue Virus-Hit Economy

“These measures are unprecedented, and have an open ended or ‘whatever it takes’ rhetoric behind them,” said JPMorgan Chase & Co. economist Allan Monks, who estimates the total cost of government measures at 4% of economic output. “The fiscal consequences will be colossal,” he wrote.

The government has come under heavy criticism for its slow response to the spread of the virus, while Sunak’s previous programs have been attacked for protecting businesses instead of workers. As schools across the country closed on Friday, Prime Minister Boris Johnson announced that pubs, restaurants and cafes will also be ordered to shut.

With business and social life on hold for as long as a year, the two are now racing to contain the damage with some of the most aggressive measures taken by any European government.

“The Chancellor’s announcement is a major and extraordinary intervention,” said Richard Burge, chief executive of the London Chamber of Commerce and Industry. “He has clearly taken on board the scale of the crisis.”

Jobs are already being lost in the U.K., Sunak warned, saying all employers in the country will be eligible for the wages program.

“To all those at home right now anxious about the days ahead, I say this: ‘You will not face this alone,” he said. “Now, more than any time in history, we will be judged for our capacity for compassion.”

Sunak’s package also includes:

  • 80% of the wages of workers whose jobs face the ax will be paid by the government, up to a maximum of 2,500 pounds a month
  • VAT payments for next quarter deferred, giving businesses a 30 billion-pound boost
  • Unlimited 12-month, interest-free loans for businesses
  • 7 billion pounds of additional welfare support, including an increase in universal credit payments.
  • 1 billion pounds of support for renters
  • Self-employed workers to get the equivalent of statutory sick pay

While the latest measures are unlikely to stop a recession in the first half of the year, it was broadly welcomed by business leaders and labor unions.

Some, however, questioned whether it offers enough help to self-employed workers seeing their work dry up and low earners with no entitlement to sick pay.

“Sunak’s wage support measures are a historic first for this country, but are bold and very much necessary,” said Len McCluskey, General Secretary of the Unite union. “These are huge decisions for any government, and especially for a Conservative government, but they have listened to the calls for action and have acted appropriately.”

‘What Bloomberg Economists Say...’

“You cannot fault the Chancellor’s efforts. The scale of the package today would have been unthinkable even a week ago. The wage subsidies are the most eye catching -- he has essentially written a blank check in an attempt to support employment. It’s no silver bullet -- jobs will still be lost and the economy will experience a recession in the first half -- but along with all the other support announced, it increases the chance of a rebound once the pandemic has passed.”

-- Dan Hanson, senior U.K. economist

Sunak said the plan will be financed through extra borrowing. The chancellor’s officials confirmed there is no limit on the amount he is prepared to borrow to tackle the virus. One pointed out that the government’s fiscal rules -- designed to ensure the budget is balanced over time -- have an exemption clause in case of a crisis.

The U.K. is facing the crisis from a stronger fiscal position than other European countries. At 2% of gross domestic product, the budget deficit is only slightly lower than those in Italy, Spain and France. But at about 85% of GDP, the U.K. has built up far less debt.

Monks, the JPMorgan economist, said the budget deficit could soar to more than 10% of GDP this year, putting pressure on the Bank of England to expand its asset purchases.

The BOE on Thursday cut interest rates for the second time in two weeks and announced it was restarting its bond-buying plan in response to the crisis, with its 200 billion pounds of purchases mainly made up of gilts. Its intervention, in coordination with the government, has so far helped to keep a lid on borrowing costs.

The yield on U.K. 10-year bonds fell 16 basis points before Friday’s announcement to 0.56%.

U.K.’s Sunak Writes Blank Check to Rescue Virus-Hit Economy

Sunak, who took control of the country’s purse strings just five weeks ago, has faced a baptism of fire.

Nine days ago, he unveiled 12 billion pounds of measures to mitigate the effects of the outbreak on the economy. As evidence mounted that the crisis was snowballing, he followed up with a 350-billion pound stimulus package comprising government-backed loans, grants and tax cuts for struggling companies.

Kallum Pickering, an economist at Berenberg, said providing companies with generous subsidies to “retain their staff will dramatically lower the risk of surging unemployment.”

“Encouraging firms to hoard their labor while authorities tackle the medical emergency raises the chance that the economy can get back to normal quickly once any containment restrictions are lifted,” he said.

©2020 Bloomberg L.P.