Sunak Tries to Save the Summer with $38 Billion Stimulus

(Bloomberg) -- Rishi Sunak’s stimulus package may help save the Great British summer. Saving the economy will be a far harder task.

On Wednesday, the Chancellor of the Exchequer announced 30 billion pounds ($37.5 billion) of tax cuts and extra spending to support the U.K. as it emerges from the coronavirus pandemic. Over the course of a 30-minute speech, he reduced taxes for home-buyers and the hospitality industry, and even offered Brits vouchers to cut the cost of eating out in August.

The measures are were aimed at reviving confidence among consumers and industries still reeling from the lockdown after much of the U.K. economy re-opened on July 4.

The success of Sunak’s package, and any prime ministerial ambitions he harbors, rest on one big uncertainty: whether Boris Johnson’s government can prevent a second wave of the virus that causes a second lockdown. Another outbreak could prove devastating for an economy that already shrank 25% in the two months to April.

“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,” said James Smith, a developed markets economist at ING.

Even if the virus doesn’t return, Sunak will have to confront the specter of mass unemployment. Joblessness is expected to surge as he starts to unwind the unprecedented government programs that are funding the wages of more than 12 million workers. He may need to provide more stimulus when he presents his fall budget in the fall.

More Support?

“These interventions will cost an extraordinary amount of money,” Sunak told the BBC on Thursday. “We are borrowing record sums this year to step in to provide support and protection for our economy. The cost of not acting in this way would be far greater in the long run,” he said. “We can’t sustainably live like this, and over the medium term we can and will return our public finances to a sustainable position.”

The state was already providing around 160 billion pounds of direct support for the economy. That figure now rises to almost 190 billion pounds, putting the budget deficit on course to hit 350 billion pounds in the current fiscal year, or a peacetime high of around 17% of GDP, according to the Resolution Foundation think tank.

For now, borrowing costs have been kept low amid the spending splurge by the Bank of England buying vast amounts of government bonds in the secondary market under its quantitative easing program. Ten-year gilt yields are now less than 0.2% compared with over 2% five years ago. But the scale of the budget deficit risks testing the equanimity of investors, with debt issuance in the first five months of the fiscal year already dwarfing the full-year record reached during the height of the financial crisis.

Sunak said low borrowing costs are helping the government. “We are borrowing at record-low rates that enable us to carry a higher degree of debt,” he told the BBC. “But it would be important that we remain alert to changes in those interest rates.”

Sunak put preserving jobs front-and-center of his speech, unveiling a 1,000-pound incentive for companies that retain previously furloughed workers until 2021, and funding for firms to hire young apprentices.

Still, with signs that job losses are already mounting before employers take on more of the burden of paying furloughed workers next month, some economists were critical of Sunak for not doing more. Mike Bell, global market strategist at JPMorgan Chase & Co. asset management, said the main risk will be unwinding the furlough program before the recovery has taken hold, which could result in millions of job being axed.

“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.

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“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.”

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Others also warned of holes in the plan, including a lack of clarity over what happens to firms in areas hit by localized lockdowns to contain specific flare-ups of the virus. Such restrictions have already been imposed in the east midlands city of Leicester.

Cliff Edge

“Businesses face cliff-edges in the autumn as existing support winds down, and so the government must consider reducing national insurance contributions and extending existing loan schemes,” said Hannah Essex, co-executive director of the British Chambers of Commerce. “Many businesses are concerned about how they will survive in the event of a local lockdown, and we ask the government to urgently set out what support will be available if that happens.”

Anneliese Dodds, the opposition Labour Party’s economy spokeswoman, told Bloomberg TV on Thursday Sunak “one-size-fits-all approach” is not “sensible” because the furlough program will be removed at the same time across the whole economy, rather than focusing on the needs of specific sectors. She also said the government must improve its coronavirus tracing program to keep the pandemic under control and boost confidence.

“Incentives can be a positive way of driving up demand but really what’s needed is the U.K. having a much stronger handle on where the disease is,” she said. “That means test, track and isolate getting sorted out.”

Nonetheless, the chancellor mounted a robust defense of his decision to wean firms off emergency support. Continuing for too long, he argued, risks workers losing skills, and giving them “false hope” their jobs would still exist once the crisis passed.

Britain’s hospitality industry welcomed the cut in value-added tax and discount meals, saying they could buy time for businesses gasping to survive after being slammed by months of lockdown. Key to any longer-term recovery will be a sustained resurgence in demand in the coming months, which remains far from certain.

Out of the Woods?

“This doesn’t mean we are out of the woods, and there are still significant challenges ahead,” said Kate Nicholls, chief executive of U.K. Hospitality. She highlighted the rent debts piling up from the lockdown as one major issue facing the industry.

James Reed, chairman of U.K. recruitment firm Reed, said Sunak could have done more to ease the burden on employers. He called for simpler employment laws and cuts to national insurance, and urged the chancellor to make fresh stimulus announcements if circumstances require.

“No one,” he said, “wants to see see jobs, jobs, jobs, turn into dole, dole, dole.”

Buried in the Treasury document accompanying the statement were details of an extra 49 billion pounds made available for public services since March, triple the latest estimate from the Office for Budget Responsibility. Of this, almost 32 billion pounds is going to health services, including 15 billion pounds for personal protective equipment for front-line staff and 10 billion pounds for the government’s Test, Trace, Contain and Enable program.

Following is a summary of Sunak’s measures, and their costs:

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