The below is an amended version of an article published in the Daily Mail on 10 June.
The economy has started to recover from the depths that it plumbed last month. But it looks likely that, after a bounce as lockdown ends, we may then be stuck for a while at around 85-90pc of normal production.
Now that might not sound too bad, but it is: a 90percent economy equates to more than three million people out of work.
So what can be done to limit the pain?
I believe we need to take bold steps including:
- Stamp Duty holiday for home-buyers
- Measures to stop zombie firms all going bust at once
- A 10 per cent pay reduction for non-essential public sector staff
- Cut VAT temporarily
- Allowing talented techies to come to Britain freely after Brexit
- Pay off the Government’s pandemic debts over 50 years
Recovery will be faster if we accept from the outset that our economic life may never return to what we considered normal.
Tourism – around a tenth of national income – won’t come back quickly. Social distancing will constrain the hospitality industry, including the pubs and restaurants we used to enjoy.
And even once the shops are open, people worried about their jobs and salaries are unlikely to spend on the scale that they once managed.
Commercial property values are likely to be shattered as so many staff work from home. A lot of development will be put on hold. The days of thousands of people huddling in a mega-office may be over.
At the same time, however, there are plenty of growth sectors that could boom.
Takeaway food is moving upmarket; on-line shopping could grow faster were it not for lack of delivery capacity; working from home will surely give rise to the development of new apps.
Transport will need to be reconfigured with opportunities, for instance, for E-bikes, which are amazingly practical, and seem to be this season’s craze.
KEEP FIRMS AFLOAT
As the old Labour Chancellor Denis Healey used to remind us: ‘When you are in a hole, the first thing is to stop digging’.
Any recovery package has to limit the number of firms going bust. Quite a few are now fundamentally uneconomic and probably can’t survive. But they need to be managed carefully so that they don’t all go bust at once.
Others have taken a hit to their cashflow, but remain viable. This group needs temporary cash to tide them over.
As well as loans, the government could also take share stakes, as could asset managers and other big investors.
A third group of companies, particularly those in the tech sector, are innovators that are about to take off – and may need early access to development capital.
Linked to this, there need to be measures to curb unemployment.
At worst, we could have six million unemployed. On a 90 per cent economy there will be more than three million on the dole, which would depress demand and lead to considerable hardship.
The Chancellor will need to encourage firms to keep as many people in work as they can.
To do this he will have to keep a type of furlough for at least the next year but adjust it to encourage part-time work rather than paying people not to work at all.
Chancellor Sunak has started down this path, which will be cheaper than paying out hugely increased amounts of unemployment benefit.
TARGETED TAX CUTS
People may be reluctant to spend so it would make sense to have a temporary VAT cut to encourage them.
If it has a positive effect on spending the extra income tax and national insurance will make up most of the VAT revenue lost. This could be the key component of a package to kick start spending.
House values are also likely to take a further bashing. Lower prices make housing more affordable in the longer term, but a sharp fall will leave many with negative equity and hit confidence.
A temporary holiday on stamp duty is a good idea. As with the cut in VAT, the increase in activity could more than make up for the lost tax revenue.
BOOST FOR TECH
The real way to get the economy growing is to reinvigorate the British tech sector. Five years ago I wrote the book ‘The Flat White Economy’ about how it bailed us out after the financial crisis. We now need the sector again to get the economy going post – to rekindle the new apps and services that will thrive in a the post-lockdown.
Talented migrants are the lifeblood of the creative economy. Any Brexit deal should not stop them coming in.
Local governments need to create the environment for creative digital to thrive with attractive culture, cheap housing and good education.
50 Years to pay
And, of course, we must start working to put public finances on a more even keel. Even the most extreme socialist wouldn’t pretend a government can borrow more than £60 billion every month as it did in April.
With the packages necessary to kickstart the economy, it will be hard to get borrowing much below £400 billion this year.
I would cut non-essential public sector pay by 10pc to match private sector cuts and use some of that money to provide positive tax incentives to spend and invest. But that is probably too extreme to be politically acceptable.
The trick with public borrowing is not to turn it off too soon. We should phase down towards budget balance over at least a decade.
But once we have retrained new borrowing, we will still be left with a debt mountain.
It took a century to pay for the debt accumulated during the Napoleonic Wars. And we only paid off the debts of World War Two through creating an almighty inflation that devalued what the government owed.
We should take a 50-year approach to public debt so as not to place too much of a burden on the next generation.
Douglas McWilliams: email@example.com +44 7710 083 652