The House of Commons Treasury Committee (Treasury Committee) has published its second report, ‘Economic impact of coronavirus: the challenges of recovery’ which focuses on the medium-term issues that have arisen as the UK has sought to emerge from lockdown.
The report follows on from the first phase of the review, ‘Economic impact of coronavirus: Gaps in support’ which focused on the gaps in the government’s key support schemes, the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS).
The Treasury Committee has expressed its disappointment at the unwillingness of the Chancellor to implement the recommendations from the first phase of its review and hopes for a positive response to this one.
The report focuses on three medium-term issues: recovery of consumption, avoiding long-term unemployment and corporate debt. The overall approach by the government is also considered together with potential long-term challenges.
There was uncertainty about whether another Budget would be announced before the end of the year. As a result, many of the Treasury Committee’s recommendations specify timing of “by the next fiscal event” to include the possibility of a mini-Spending Round in the Autumn instead of another Budget.
Recovery of consumption
- The latest GDP figures suggest that the UK economy has started to bounce back from the recession in the first half of 2020.
- There is continued consumer caution about re-engaging with the economy which has been fuelled by concerns about risks from Coronavirus and job security. This is slowing down a recovery to pre-pandemic levels of consumer spending.
Following the end of the Eat Out to Help Out Scheme, the Treasury Committee recommends that the Chancellor consider whether additional measures need to be introduced to encourage consumer spending.
Avoiding long-term unemployment
- The possibility of rising unemployment becoming permanent is a critical risk of the pandemic.
- COVID-19 has impacted different groups of people unequally.
- Providing effective targeted assistance to businesses and individuals who need it will be crucial.
The Treasury Committee recommends that:
- The Chancellor gives careful consideration to whether a targeted extension of the CJRS and potentially other schemes is required.
- The government ensures the quality and reputation of vocational/re-skilling schemes, which has been poor in the past, is monitored and easy access to the Kickstart scheme for SMEs and charities.
- The Treasury publishes an updated version of its distributional analysis in the Plan for Jobs together with an equality impact analysis (including unemployment rates) of how the recession is impacting different groups.
Corporate debt
- It is unclear how the government expects businesses to pay back loans in the future.
- There are concerns about a potential lack of capacity and willingness in the private sector to help Small to Medium-Sized Enterprises (SMEs) struggling with corporate debt as this will prolong the recession.
The Treasury Committee recommends that the government outlines a plan to address corporate debt which considers a wide range of potential interventions such as student loan type structures for SMEs, where repayments are conditional on the SME business reaching a certain level of financial health.
Potential long-term issues and government approach
- Long-term issues may arise from a sharp rise in the level of public debt and, potentially, an ongoing rise in borrowing to mitigate economic damage triggered by COVID-19.
- There is concern about the impact of COVID-19 on the insurance sector, particularly as businesses will need confidence that they have adequate insurance cover to resume normal activities.
- Local authorities have played a crucial role in responding to local outbreaks effectively but local government spending is often treated as a residual in the budget-setting process.
The Treasury Committee recommends that:
- The Chancellor sets out an initial roadmap of how he intends to place government finances on a sustainable footing and clarify the avenues that will be used (e.g. closing the productivity gap, income gap, educational gap etc.).
- The government should consider whether intervention is required to support the insurance sector.
- Local government spending must not be treated as a residual in the budget-setting process and it should meet the financial needs set out in the submissions from local authorities.
Links
COVID-19: Interim report on economic impact of Coronavirus
The House of Commons Treasury Committee (Treasury Committee) has published its interim report, ‘Economic impact of coronavirus: Gaps in support’, as part of its inquiry into the economic impact of Coronavirus.
Kickstart Scheme open for applications
The government’s ‘Kickstart’ job creation scheme aims to help young unemployed people. It is now open for applications.
COVID-19: Coronavirus Job Retention Scheme
Coronavirus Job Retention Scheme: a cash grant that is designed to allow employers to retain staff who would otherwise be laid off.
COVID-19: Self-Employment Income Support Scheme (SEISS)
COVID-19 Self-Employment Income Support Scheme (SEISS). HMRC's claims portal for the second grant opens in August 2020.
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