NIESR Press Release: Sunak must do 'whatever it takes' to support GDP and jobs
Chancellor Rishi Sunak must use his financial statement tomorrow to show that the Government is still determined to do “whatever it takes” to support economic growth and preserve jobs in the face of measures imposed to prevent the spread of the Coronavirus, according to the National Institute of Economic and Social Research.
He should maintain the government’s jobs furlough scheme, which has been highly successful in protecting over 9 million jobs over this period and continues to support around 6 million furloughed workers. Ending the scheme prematurely could lead to permanent long-term damage to the economy if those who become unemployed lose their skills and attachment to the labour market resulting in permanently higher unemployment and weaker productivity.
Analysis by NIESR shows that premature withdrawal of the support that lowered productivity permanently by 1 per cent and raised unemployment by 1 per cent would lead to GDP being about 2.5 per cent lower than it would otherwise be, leading to the need for higher tax rates to make up for lost revenue. This would amount to a permanent loss of GDP of £50 billion per annum (as of 2022) or £750 per person (Figure 1).
Figure 1: Impact of lower productivity and higher unemployment due to premature withdrawal of fiscal support
Impact on GDP
The UK should take advantage of the fact that additional borrowing is easily financed at low interest rates. The nature of the Covid-19 crisis means the government is effectively borrowing from households who cannot spend to support the incomes of those who are unable to work. This means borrowing is being financed from within the UK rather than the UK building up debts with the rest of the world.
The priority for a new round of spending should be to bring forward spending promised as part of the government’s levelling up agenda. The substantial additional public investment of 3 per cent of GDP by 2023 unveiled in the March budget will now come at a time when unemployment is rising and the economy is operating well under full capacity.
“The justification for keeping fiscal support measures going is that it makes economic sense,” said Garry Young, Deputy Director for Macroeconomics at NIESR. “Premature withdrawal of the measures could mean that the long-term adverse impact on the public finances ends up being worse than the cost of continued short-term support.
“Probably the most important policy measure the Chancellor could take would be to bring forward spending promised as part of the government’s levelling up agenda. In his March budget, the Chancellor announced plans for substantial additional public investment. It is difficult to think of a better time than now for the government to invest more. This would increase demand in the UK economy and provide support when it is most needed.”
NIESR also recommends rejecting calls to lower specific taxes on property sales and consumer spending:
- Announcing a reduction in Stamp Duty on property purchases in the autumn likely to encourage buyers to defer house purchases until then, damaging the housing market in the short term.
- Offering vouchers or a reduced rate of VAT for spending in bars and restaurants will not be the most effective way of helping a sector for which the problem is not a lack of demand but an inability to meet existing demand safely.
Notes for editors:
The full document of NIESR’s analysis of the options available to the Government can be found here.
NIESR will also publish reactions to the Summer Statement on Wednesday 8 July after Chancellor Sunak has finished speaking.
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