THE UK CHANCELLOR SHOULD combine a £30 billion extension of emergency Covid support with £70 billion of additional stimulus as part of a £100 billion budget package to boost Britain’s economic recovery, according to a major new report published by the Resolution Foundation.
How to throw good money after good assesses the latest economic outlook confronting the Chancellor as he prepares for a pivotal Budget, considers the policy measures needed to support new plans for phasing out social distancing restrictions, and boost Britain’s recovery after the deepest economic downturn in over three centuries.
The report notes that the UK’s economic outlook has changed considerably since the last official forecasts in November, with the second national lockdown depressing economic activity and meaning that economic support packages will need to last well into 2021.
More positively, businesses have adapted to working through lockdown and the rapid pace of the vaccine rollout means a path towards lifting restrictions in the coming months. But that path will be a gradual one, as shown by the Prime Minister’s ‘roadmap’.
The report finds that these changes are likely to result in a more positive economic starting point for the Budget, with GDP growth in 2020 coming in somewhat better than feared at -9.9 per cent (compared to a forecast of -11.3 per cent in November). However, the current lockdown means GDP growth for 2021 is likely to be revised down from 7.1 per cent to around five per cent.
Borrowing is likely to follow a similar pattern, with total borrowing in 2020/21 revised down from £394 billion to £382 billion – but revised up for 2021-22 from £164 billion to £186 billion, as the Chancellor extends emergency Covid-19 support into next year.
The Foundation says that faced with this economic outlook, the Chancellor must decide what level of support the UK economy will need in the coming months and years, and what form that support should take.
The Prime Minister has already committed to extending emergency support in line with the new timetable for easing public health restrictions, which should include the furlough scheme remaining in place until the summer and targeted grants for the worst affected sectors such as hospitality.
But to date, there has been little public debate in the UK about the need for further stimulus to boost the economy once restrictions have been lifted.
This is all the more surprising, says the Foundation, given the UK has experienced one of the biggest economic shocks of any advanced economy, and because across the Atlantic, debate is raging over President Biden’s $1.9 trillion stimulus package. In contrast, the current UK policy of phasing out economic support is on course to reduce economic growth next year, rather than boost it.
To address this gap, the report says that the Chancellor should combine £30 billion of extended emergency support for firms and workers with roughly £70 billion in targeted stimulus measures. These should include:
- A £27 billion retraining and job support package to reduce unemployment and support workers in career shifts.
- Extending Universal Credit, including by making the temporary £20 a week uplift permanent, to protect income during long period of elevated unemployment.
- An £18 billion green investment scheme to create jobs and kickstart the UK’s zero carbon ambitions.
- A £9 billion voucher scheme focused on boosting Britain’s High Streets and local retailers.
- The scale of support – worth five per cent of GDP – is significant, but smaller than the Biden Plan (worth nine per cent of GDP). This reflects the fact that the UK already has in place significant policy support, including via furlough.
Finally, the Foundation says that while now is not the time to implement significant tax rises, these will be required once the recovery is secured. At that point around £30 billion of consolidation will be needed to balance the current budget and build fiscal policy space for future recessions.
James Smith, Research Director at the Resolution Foundation, said: “The Chancellor is approaching his second Budget at a pivotal moment for the economy, with the country likely to emerge out of the biggest economic downturn in over three centuries in the coming months.
“But while in the US debate has focused on President Biden’s $1.9 trillion stimulus plan, the UK debate has got stuck on how to withdraw support. Instead, the Chancellor should combine extending existing support with fresh stimulus once restrictions are lifted to deliver a £100 billion plan to boost Britain’s recovery.
“That is the scale of ambition needed to increase the chances that Britain sees a strong recovery from its pandemic-induced slump, and to ensure the recovery reaches firms and families across the UK.”
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* Source: Resolution Foundation