Yael Selfin, Chief Economist in the UK comments on the announcements made in today’s Summer Statement
The Chancellor was quick to support the UK economy at the start of the lockdown, with the economy facing one of its worst economic crises. Today he announced further steps aimed at protecting and creating jobs over the coming months, as the economy comes out of lockdown and major support programmes such as the Job Retention Scheme start to wind down.
The economic environment is precarious: between February and April, GDP fell by nearly 25% and 9.4 million workers have been placed on furlough. On their own, the measures announced in the Summer Statement will only go some way to support the economy, with major decisions left to a Spending Review and Budget in the Autumn.
The total cost of measures in the Summer Statement add up to £30 billion; and together with the £49 billion allocated to public services, this could mean the total cost of measures due to COVID-19 could reach £190 billion. New measures announced last week and during the Summer Statement include additional £5 billion spending on infrastructure, a £1.5 billion support fund for the arts, a £3.1 billion investment in ‘greening’ homes and public infrastructure, as well as cuts to VAT and subsidised spending in August for hospitality businesses, and a temporary stamp duty cut.
In total, the new measures could see the deficit rise to almost £370 billion this year, or 19% of GDP. Debt could end up being almost equal to the level of GDP by next spring, the highest since the aftermath of the Second World War.
Low interest rates mean that the cost of servicing debt has stayed low. Between the Budget in March and the Summer Statement, projections for public sector borrowing this year multiplied six-fold, yet projections for interest costs for central government borrowing fell by more than £2 billion. This provided the government with room to increase spending if it can help secure a stronger economic recovery. There are two areas where the Chancellor could have gone further in his statement:
Upskilling and retraining for a post COVID-19 jobs market
Despite the measures announced today, it seems inevitable that unemployment will increase significantly by the end of the year as some businesses close, others scale back their operations while the pandemic is still on, while others re-focus their business models to address new economic realities and customer behaviours. Our forecasts point to unemployment reaching 11% in 2021, for the first time since the 1980s.
After experiencing record low unemployment only three months ago, a quick ramp-up in training is required to help those losing their jobs to find opportunities in new parts of the economy. The approach needs to be more systematic, with a national training programme set up to upskill and retrain large numbers of people, providing quality, relevant, and transferable qualifications. It will need to be designed and delivered together with businesses across the regions to equip those who have lost their jobs with the skills needed to go back to work in the growth sectors of the future.
Infrastructure to future-proof the economy
The lockdown offered an opportunity to conduct a major simultaneous experiment in teleworking for businesses and their employees and in quickly shifting more commercial transactions online. Even when restrictions are eased, demand for digital products and services will stay high and that requires investment in infrastructure to support it, accelerating the build-up of fast broadband and 5G.
Better digital infrastructure can enable more widespread use of the Internet of Things, where the addition of sensors and internet connectivity to machines, warehouses and other physical infrastructure enables tracking, automatic verification and response. This will improve productivity. It is also essential for the development of autonomous vehicles.
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