The virus has put everything on hold: weddings, job moves, spontaneity. If this mandatory standstill weren’t painful enough, it seems our recovery from the severe economic damage it’s wrought has been put on hold too. There are daily updates of venue closures and redundancies, from Currys PC World to Pizza Express, and this week the temporary shutdown of every Cineworld in the UK. With the winter months looming, and an unemployment crisis coming down the track, the state of the economy is bound to get worse for business, with hopes for relief dashed somewhat once Chancellor Rishi Sunak delayed the Budget into next year.
The reasons for scrapping the Budget are these: the Prime Minister has braced us for another six months of restrictions and crackdowns, which makes long-term planning a near-impossible feat. With the end of the furlough scheme around the corner, Sunak had to tackle more immediate concerns. The ‘winter economy plan’ he announced in place of a Budget — the latest emergency measures — offers more targeted subsidies to help get businesses and their employees through the coming winter months.
The Treasury isn’t alone in postponing big announcements. Policy initiatives across all sectors of government have stalled. Still no white paper exists to explain how the UK will achieve its net-zero carbon pledge by 2050 — a commitment that was put into law last year. If a second wave of the virus looks anything like the first, far more firepower will be needed from the Treasury to keep the economy afloat. With no clear way to predict what a winter of Covid looks like, how could any Chancellor meaningfully update the public finances or begin to consider how to pay back our pandemic debts? Who knows what we’ll be spending on the crisis next month — or indeed, next week?
But while the full costs of the virus remain unknown, there’s little dispute over the state of our finances: with the debt-to-GDP ratio already over 100 per cent, the national debt well over £2 trillion and this year’s budget deficit now estimated to exceed £400 billion, it can be said with confidence that the Chancellor has a mess to sort. Sunak can pull three different levers to get the Treasury’s books balanced again: cut spending (which this government is loath to do), hike taxes (which threatens their manifesto commitments) or go for growth. This last option will be a vital part of the Chancellor’s strategy: tax rises will slow recovery and punish businesses that adapted at rapid speed to meet our needs at the height of the crisis. In contrast, a growing economy means more jobs, increased security and a rise in living standards.
A letter to the Chancellor published this week — led by the Institute of Economic Affairs and co-signed by more than 30 MPs, CEOs, think tanks and academics — notes that the conditions for growth are not a mystery: reductions in taxes combined with a light-touch approach to regulatory burdens on productive sectors have a track record of bolstering economic recovery. Most importantly, the state of the economy does not need to be fully realised to implement these changes — such policies would benefit an economy under restrictions as they would an economy free to flourish.
Even announcing targeted tax cuts to help rejuvenate the business community and labour force could go a long way. With a jobs crisis looming, a top priority of the government in the coming months will be to aid the process of getting people back into work. An estimated one million people have been made unemployed by this crisis so far, with more at risk once the furlough scheme ends. The Prime Minister has announced schemes to help people retrain and re-skill, but preparing the workforce for new kinds of jobs is only half the battle. Employers hit hard by the crisis will need every incentive to hire new staff, and this should include taking an axe to the payroll tax.
There are several ways to go about tackling the burden of national insurance contributions (NICs), as laid out in a paper published by the Centre for Policy Studies in June, led by former chancellor Sajid Javid. Employers’ allowance could be hiked substantially to give smaller businesses a big discount on their NICs, or the threshold for paying NICs could be raised to be in line with the personal allowance, which the report estimates would reduce the cost of a full-time employee by £500. A NIC holiday could also be considered for new workers, to encourage the immediate hiring of staff into new roles.
As the economy recovers, British business will need a renewed lease of life. This includes investment in workers, but also in the structure of a company and the machinery and resources that prop it up. Yet the tax system is currently stacked against companies that would invest in equipment and infrastructure to boost their productivity. Dubbed the ‘factory tax’ by the Adam Smith Institute, the financial penalties attached to investment have taken their toll on manufacturing in precisely the areas the government intended to level up before the pandemic hit. Allowing all businesses to immediately write off capital expenditures would enable them to build up their resources and transition to the demands of a post-Covid economy, without being financially penalised for doing so.
Changes like these are nothing in comparison to the kind of confidence that a cure for Covid could inspire. But we hear too much about pipeline dreams and too little about tangible policies which could guarantee a boost in recovery. While the Chancellor may not be well placed to present forecasts for future spending or revenue, it is abundantly clear that companies will need more than support packages to keep them afloat.
Conditions in the medium term must be business-friendly, creating a more liberal environment to spur on growth. Once companies are off their knees, it needs to be as easy as possible for them to run.