Chancellor Rishi Sunak has unveiled a raft of measures worth £30 billion in a bid to kickstart economic recovery and reduce unemployment in the aftermath of the Coronavirus crisis.
While largely welcomed, commentators expressed concerns that some of the give-aways would lead to issues further down the line.
In his Summer Statement on Wednesday, the Chancellor announced a new jobs retention bonus policy to encourage companies to bring back furloughed workers as the support scheme starts to wind down.
Employers will receive a £1,000 bonus if they re-employ a furloughed worker, who must be paid at least £520 per month between November and the end of January 2021.
If all 9 million furloughed workers are re-employed, this scheme alone will cost the government £9 billion.
David Page, head of macro research, AXA Investment Managers, welcomed the Government’s employment package.
Page said: “We believe the intention of the government is correct. The furlough scheme could not stretch indefinitely and additional measures to try to quicken economic activity to create additional jobs is likely the most effective means to stop furloughed workers becoming unemployed over the coming quarters. It is important that these measures show continued fiscal stimulus and are not balanced by revenues raising measures.
“The Chancellor acknowledged that ‘over the medium term’ the public finances needed to be managed in a sustainable fashion, however, with household surpluses increasing, an attempt to lower government borrowing now would likely push the economy deeper into contraction and risk deflation.”
The Government has also pledged to pay the wages of 16-24 year olds at risk of unemployment for six months as part of a £2 billion job creation scheme.
The Chancellor warned that young people were particularly vulnerable because they are two and a half times more likely to work in sectors that have been closed as a result of lockdown and said the Government did not want that generation to be “left behind.”
Opportunity for advice firms
Scott Stevens, head of adviser recruitment and acquisition, Quilter, described the scheme as the “ideal opportunity” for advisers to welcome fresh blood into the profession.
Stevens said: “As an industry we have talked until we are blue in the face about the advice gap and how we need more advisers coming into the industry, particularly a younger and more diverse cohort. But it’s not just advisers we need, it’s paraplanners, support staff and many others.
“This government package is an ideal opportunity for the advice industry to put their hands up and say we need more staff and we are happy to get involved. Where possible advice firms should be looking for ways to use the Kickstart Scheme by setting up work placements for those aged 16 to 24 and apprenticeships for all age groups.
“More than just good practice, it will be good for business as this will showcase our profession as one for younger people to consider. Plus, we cannot deny that many entrants to the job market will not have heard of financial advice and by opening up our doors to more workers we may in turn find that we inform more people about the value that financial advice can add.”
To get the economy moving, the Government has announced that it will slash VAT on hospitality and tourism from 20% to 5% from 15 July to 12 January 2021.
The Chancellor said the economy “relies on consumption” including pubs, cafes, hotels, restaurants and BnBs and added that the sector had suffered the highest furlough rate.
In an effort to encourage consumers to play their part, the Chancellor announced an “Eat out to help out” scheme, promising a 50% reduction in restaurant bills Monday- Wednesday during August, allowing people to get off up to £10 per head.
Homebuyer boost could lead to market issues
In a boost to homebuyers, the Government also announced a widely-anticipated temporary cut to stamp duty. From today, stamp duty on properties below £500,000 will be dropped until 31 March 2021.
Laura Suter, personal finance analyst, AJ Bell, said the tax cut would provide a “much-needed shot in the arm” for the property industry, which saw a complete shut down during lockdown and is now plagued by concerns of falling house prices.
However, Walker Crips Property Income director James Allen warned that it could lead to greater volatility in the long run.
Allen commented: “When former Chancellor Osborne touted his change to stamp duty, there were concerns from the market about a spike in transaction completions before the rises came into effect, followed by a dramatic slowdown with tax takings falling in relative terms. All of these things subsequently happened.
“Tax take will obviously fall and, at the end of the holiday, transactions are likely to slow significantly again, risking price volatility at a time when the market is craving stability. In order to achieve the Chancellor’s aim of protecting the housing market, the most obvious route would be to simply reverse the counterproductive changes introduced by Chancellor Osborne.”
Russ Mould, investment director, AJ Bell, echoed the sentiment, stating: “The danger is that demand is all crammed into the next few months and business levels then plunge again come April 2021 when the levy returns.”
Adrian Lowcock, head of personal investing, Willis Owen, said the key takeaway for investors watching the Summer Statement is that the government is “clearly concerned” about the economy, and therefore willing to put huge sums of money in to ensure it rebounds strongly from the lows seen in April and May.
Lowcock said: “The backstops and support already provided by the government are one of the reasons UK stock markets have already rebounded strongly, and the next few months will be critical if that recovery is to be maintained.
“For investors, the big unknowns are whether the presence of COVID-19 has permanently changed behaviour, and whether we will experience a second wave. Either event could have major ramifications for the stock market.”
Warnings around Autumn Budget
However, industry experts warned that the Autumn Budget was likely to play host to the introduction of tougher measures.
Hinesh Patel, portfolio manager, Quilter Investors, said: “Sunak implied tough decisions will come in the Autumn in the form of a spending review. If Covid-19 cases begin to pick up again and stall the nascent recovery, this is likely to be pushed to the next fiscal year as spending and stimulus will remain key.
“However, while the picture may look relatively bleak for the immediate [future], the government will remain comfortable with their ability to service the debt and there is more room to expand. The Treasury and Bank of England are working hand in hand, and this should help guide the UK through this crisis.
“This is the first stage in understanding the government’s plans to withdraw the life-support machine currently propping up the UK economy. While there are still some sectors which could yet see further fiscal stimulus, the Chancellor and the Governor of the Bank of England need to ensure their plan to exit this era of fiscal and monetary expansion does not cause the exact reaction they are looking to avoid.”
Tom Selby, senior analyst, AJ Bell, added: “Today’s statement was always likely to focus on ‘good’ news items designed to stir the UK economy from its economic slumber.
“However, the Chancellor was clear stabilising the public finances and paying off the estimated £300 billion bill racked up during the pandemic will be a key priority in his Autumn Budget later this year. And with Boris Johnson ruling out a return to austerity, a tax-grab seems almost inevitable as the Treasury seeks to balance the books.”
