Budget response: A continuation of the government’s failed covid strategy
No one envied the task facing Rishi Sunak.
Over 100,000 dead, an economy which has shrunk by over 10%, and the debt burden spiralling to over 100% of GDP.
And worst of all, a Prime Minister whose inability to see beyond the next days’ headlines makes him completely inadequate to the task in hand.
Sunak needed to set out a credible budget to support a fast post-covid recovery whilst providing reassurance over long-term government debt.
He failed.
His preference for social media rather than social reform, and Instagram over innovation will come back to bite him. Counterintuitively, it will not help his public image to have such obviously good PR, especially in such a serious role as Chancellor of the Exchequer. He would have been better to stylise himself as the serious man of principle (a Joe Biden to Johnson’s Trump, or to go back further a Martin Bell to Johnson’s Neil Hamilton).
This article reviews the budget, before analysing the broader economic policy response to the covid economic crisis, showing how our government has failed on the grounds of both promoting covid-safe economic activity and helping our long-term recovery.
Corporation Tax: The right ideas wrongly applied
The headline of the budget was the pre-announcement of an increase in Corporate Income Tax (CIT) to 25% to take place in 2023/4. Pre-announcing an increase gives an incentive for companies to rearrange their affairs to leave the UK within a few years. This possibility is not available in the case of a sharp increase now, especially if it is combined with a pre-announced staged reduction.
A two-year imposition of a 30% CIT rate, followed by a sharp reduction to 25% and a continual 1% reduction back down to 20%, would have caught UK-based profit-making companies immediately but would have removed any significant incentive for them to relocate activities given the prospect of immediate reductions on the horizon.
Many, including Labour have argued it is not right to raise taxes now, a generally sensible principle but one which is misapplied in the case of CIT. CIT only applies to companies making a profit, whilst the big problem facing corporate Britain is the covid-driven slump in consumer demand, and thus corporate income, which has not been matched by an equivalent fall in costs.
In simple terms, for the average UK business, revenue has collapsed (in many cases to zero for a sustained period) whilst costs have not collapsed, with the only cost reductions being the partial covering of employment costs by the furlough scheme and reduced input supplies being purchased. Most fundamentally for most businesses, they have been required to continue paying expensive commercial rent on their properties.
There was more logic behind the innovative investment “super-deduction”, which allows firms to offset 130% of investment spending on plant and machinery against profits for the next two years, starting next month. The chancellor explained that if a company spent £10m on new equipment, its taxable income would be reduced by £13m.
This is a complete volte-face in conservative party corporation tax policy, recognising that the treatment of investment is more important than the headline rate which has so obsessed the last few Chancellors. Although previous governments have tinkered with the tax treatment of investment before, the size of this policy far exceeds any other.
Through its specialist focus on investment, which is the principal driver of productivity growth and technological change, it is well-targeted and singularly the best part of the budget, and even the best single fiscal policy undertaken by any conservative chancellor since 2010. In the long-term, we should move towards a higher permanent rate of capital allowances (the rate at which firms can offset capital investment against tax), alongside a CIT rate in the early/mid 20’s.
However, in a prime example of muddled thinking, the “super-deduction” coincides with a delayed increase in the CIT headline rate, which is due to take effect when the outcome of such investments is likely to be turned into profits. The real value of the investment allowance, and thus its efficiency as a policy, is increased by higher CIT headline rates in the year in which investment is undertaken (i.e. this year and next).
Thus, it would have been more consistent to increase the CIT rate (to say, 30%), giving firms an extra incentive to invest heavily now, with a lowering of CIT back to 25% and lower in subsequent years when the return on investments is realized.
Taxes on income and consumption: Hamstrung by manifesto commitments
The changes to CIT attracted most of the headlines, with the Chancellor choosing to just tinker slightly with other taxes, hamstrung by the manifesto commitments not to alter rates of income tax, national insurance and VAT.
Freezing income tax and national insurance bands was the right move given such restrictions, since a multi-year freeze allows substantial extra revenue to be generated over time. It allows the Chancellor to say he’s keeping within the law, if not the spirit, of the manifesto commitments.
A sensible possible would be to abolish the personal allowance, a supposedly progressive tax relief but one whose value increases with earnings. However, stating that this does not break the manifesto commitments through not technically changing rates will be stretching definitions far too far to be credible.
The absence of any focus on NIC’s was also a surprise, given its potential superiority as a short-term measure over furloughing (to be discussed more later).
On VAT, the major announcement was to extend the temporary reduced rate of VAT of 5% until 30 September 2021, whilst preparing for a new rate of 12.5% from 1 October 2021 to 31 March 2022
The government was right to do the first. Temporary VAT cuts such as this help both encourage consumption and support cash-flow for companies which have suffered hugely over the last year. It will encourage people to holiday in the UK this summer — this should have been the policy priority last summer, instead of the bizarre objective of helping foreign tourist industries and ensuring the British middle classes spent as much of their money outside the UK as possible.
However, the six months 12.5% rate is unnecessarily complicated. A superior alternative would have been to extend the reduced VAT rate until the end of 2021, encompassing Christmas, before increasing it back to its normal 20% rate for 2022.
VAT should do heavy lifting of increased revenue. There are two ways the VAT can be increased:
Firstly, increasing the rate of VAT. 20% is certainly not high by international standards, and there is a good trade case for matching Ireland’s 23%, and a very good revenue case for going much higher, given VAT can raise significant revenues without the same implications for economic growth than income or corporate taxes.
Secondly, through expanding the base of VAT. Here, the UK is a real outlier being one of the few countries using VAT to apply 0% on food and drinks.
The first option was unwisely ruled out due to Conservative manifesto commitments. However, this will be tested in years to come, and may only survive this parliament by the sleight of hand announcing increases in VAT to take place starting in the mid-2020s.
The second is less recognised but has significant revenue potential as well as many other benefits. The UK is unusual in its application of VAT, preferring to apply it to a narrow range of items, zero-rating most food and drink as well as children’s clothing. The official justification for such treatment is that such items form a particularly large proportion of consumption for low-income groups and thus imposing VAT on such items would be a regressive tax.
This of course is true but fails to consider how many other countries (including all EU countries, with the slight exception of Ireland) manage to impose VAT on such items yet use the benefit system to compensate low earners.
Expanding the coverage of VAT to cover all consumption could be justified by the government in terms of closing loopholes, reducing possibilities for fraud and ensuring consistency between different businesses (unlike the current situation where a fish and chips shop must charge VAT whilst a Greggs next door does not have to). It would be essential to compensate low-income groups through permanent increases in universal credit, child benefit and pension payments to ensure they are not net worse-off from the overdue reform.
Such a joined-up approach would be a progressive way of raising substantial additional revenue, in addition to reducing the distortions and complexity caused by different VAT rates.
Finally, the government could and should have committed to lowering the VAT threshold. Currently, at nearly £100,000, it is more than twice as high as all but one EU country. Although the current circumstances would be the worst possible time to do this, a pre-announcement of such a reduction (to say, £50,000) within 2–3 years would correct a major anomaly with the tax system and bring extra revenue in the long-term.
An opportunity for new taxes
The UK tax system is due to a complete overhaul.
The suggestion by Lord Adonis of a bespoke tax reform commission led by Ken Clarke and Alistair Darling has some merits and could protect Chancellor Sunak from some of the unpopularity which could otherwise come his way. As I will reveal in ‘The Great Fiscal Restructuring’, a book later this year, broadly speaking, we have a 20th century tax system for a 21st century economy.
Transiting from one to the other requires eliminating some existing parts of our tax system, most noticeably national insurance contributions, and reducing taxes on earnings overall whilst introducing or expanding other taxes.
There are two big commitments the government could and should have made as part of long-term reforms to the tax system.
The first would be to gradually implement a carbon tax. This should have been done already upon the UK leaving the European Emissions Trading Scheme (ETS) at the start of this year, as the UK had the opportunity to develop a superior approach (carbon tax) rather than just do a UK poor imitation of the ETS. The UK could commit to a carbon tax being its primary climate change mitigation measure, slowing its introduction to help companies adjust to the new regime. An immediate step in the right direction would have been an increase in fuel duties, after a decade-long freeze.
Keeping to theme of applying taxes on undesirable consumption, Sunak had an unrivalled political opportunity to make progress was on tackling our obesity epidemic through health-related taxes. The slogan ‘Protect the NHS’ could and should have been reappropriated for a much-needed aggressive approach towards the taxation of sugary drinks, salty snacks and high-fat food. This would provide an easy justification for the expansion of VAT towards sausage rolls, biscuits, cakes and other items not taxed for reasons too ludicrous to explain. It could also provide justification for taxing salt, sugar and high-fat foods in a similar way to alcohol and cigarettes, where it is widely accepted that specific taxes should be levied as a result of their health consequences. At a time when the public are more aware than ever of the strains on the NHS and the importance of good diet (due to the links between obesity and covid risk), this was an opportunity missed. Announcing escalating tax increases on unhealthy food and drink would have provided a gradually increasing source of government revenue in a way likely to have some acceptability to the taxpaying and voting public.
Alcohol and cigarette duties are (rightfully) already high but given the phenomena of relatively cheap alcohol in supermarkets, the government could have either replicated the Scottish minimum price on alcohol or introduced a new special supermarket levy on alcohol drinks of 20%. Such a policy would also help pubs which have suffered through being undercut by supermarkets in recent years.
Expenditure
There is no doubt that even with a more effective response to the pandemic, and with a much-reformed tax system, there will have be changes to public spending.
The criticism of a 1% increase in nurses pay is predictable, but the crushing public finances and the loss of jobs and livelihoods in the private sector means that nurses relative position in society would have increased from this. There is a good case for a special one-off bonus to such staff (possibly in the form of consumer vouchers) in recognition of their incredible service in an unprecedented crisis, but it is intellectually sloppy to argue for a general increase at a time of widespread falls in real income.
There are substantial pressures on many areas of public expenditure, with healthcare the most obvious but also the police, defence and education having coped with harsh spending settlements for the past decade. In neither of these areas are continuing reductions realistic.
Local government in particular has borne the brunt of reductions, and the dilapidated state of local government plus the need for an overhaul of council tax should lead to a comprehensive overhaul, with council tax being phased out and replaced by a land value tax and local authorities being given the right to impose local income and turnover taxes.
With a widespread recognition that universal credit must be increased (at the very least on a temporary basis), the only areas in the welfare state budget enabling potential savings relate to pensions and housing benefit.
The foolish commitment to the pensions ‘triple lock’ will test the Conservative commitment to the national interest. There was no defence for it prior to the general election except political expediency, and no there is far less defence for it now when the country faces a fiscal crisis partly caused by a lockdown motivated primarily to aid the elderly.
A broadening of the VAT base provides a potential way out of this problem. As outlined earlier, since extending VAT to more products reduces the real income of pensioners and other fixed income groups, compensatory increases in benefits will be required. This could thus allow the maintenance of the triple lock, but with less serious net fiscal consequences.
Our long-term fiscal stability could have also been strengthened by bringing forward the increase in the state pension age. Under the Pensions Act 2007 the State Pension age for men and women will increase from 67 to 68 between 2044 and 2046. This will undoubtedly have to be brought forward, so it would be advisable to announce the change now, with a possible schedule of increases to 68 in 2032, 69 in 2036 and 70 in 2040.
Increasing the age at which state pensions are claimed could have been sold as part of the protective measures necessary during the pandemic i.e. one year of not working and being supported by government intervention requires one year added to working life in order to help pay for it. This might be harsh for those in medical and caring professions, for which this has been the hardest year of their lives, justifying specific measures for them.
Housing benefit currently costs the UK approximately £20 billion per year, money which is transferred from the taxpayer to private landlords via a low paid renter. In essence, it is a fiscally irresponsible way of redistributing from the poor to the rich, and we should find an alternative to such a profligate and heinous approach.
The tax regime should be incentivising landlords to sell by pre-announcing sharp increases in taxes affecting landlords, including capital gains tax and council tax, to take place in coming years. This should incentivise existing landlords to put their properties on the market in advance of the taxes coming to effect.
Since the high price of housing in the UK means the government realistically must help some low-income groups to fund housing, it should be done whilst ensuring the government receives an asset in return for its expenditure. Thus, government policy should be to buy properties from landlords selling, and house housing benefit recipients directly, charging sub-market rents depending on their income and other status.
This brings us neatly to the biggest, but least talked about issue, in modern UK political economy.
La La La La Land
We have talked about labour and capital. We have not (and almost as a rule in polite society do not) talk about land, which is both where the real challenges and injustices are. It is a typical diversionary tactic to allow intense debate within a very narrow field.
Specifically, in our current economic and political quagmire, we need to focus on this one issue above all other areas. This is the area of commercial property. Its treatment allows us to unlock entrepreneurial activity and allow flourishing businesses, including on our high streets, as well as helping to secure the UK’s fiscal stability.
Many productive businesses are struggling and were struggling pre-covid and will be struggling after covid due to inability to afford ever-rising commercial rents. Independent coffee shops, cafes, pubs, hairdressers and specialist shops with strong local consumer demand and high turnover still close due to commercial landlords ever-increasing commercial rent demands.
This is just ignored, with the sad exception of ill-conceived ideas regarding reductions or suspensions in business rates, a policy which will never help the supposed beneficiaries due to commercial property owners’ incentive to increase their rent demands as a consequence. Advocates for such policies (which are generally conservative) know this policy will not help struggling businesses, and it is only pushed due to the enormous lobbying and political power of the commercial landlord sector.
At one point in summer 2020, it did genuinely appear that the governments sole economic priority was preserving the business models of commercial rent collectors in central London. The daft concern regarding Pret-a-Manger, and comparative absence of interest in manufacturing, technology and agriculture summarized the lop-sided political economy of the UK.
The nature of the emergency would have justified an ambitious government taking actions considered extreme in normal circumstances. Firstly, just as government simply made it illegal for residential landlords to make tenants homeless, an equivalent scheme could and should have been implemented for commercial landlords. A related alternative would have been to temporarily ban, or impose a windfall tax, on commercial rent, or pre-announcing a long-term tougher tax regime for commercial landlords. These will have the impact of encouraging landlords to sell their properties to any willing buyer, which brings us to the case for the UK government buying commercial property.
The size of the fiscal stimulus can be increased significantly if there are significant assets governments can buy as collateral. The most obvious collateral, as ever, is property.
Government has an unrivalled potential to exploit procurement economies of scale. This is basically the ability to buy a huge amount of a good or service at low unit costs — this is most obvious in the case of pharmaceuticals, where governments have obvious market power in their role as the major (sometimes) sole buyer.
Given the likely financial troubles some commercial landlords would be suffering, there is potential for mutually beneficial deals whereby government swoops in and buys large portfolios of such assets, relieving landlords of cash-flow challenges whilst giving the government valuable assets. Government as commercial landlords can make the decision to temporarily release businesses from their rent commitments during the pandemic.
In the short-term, businesses can be relieved from draining commercial rents which undermine their long-term future, whilst providing government with an asset which could later be sold (potentially at a high profit), as well a good source of government revenues.
There is similar scope for government to offer support to home-owning individuals, particularly families, struggling in the pandemic. An inability to pay a mortgage through no-fault of your own can be financially devastating for a family and leave a legacy of lifelong insecurity. The government could buy properties directly from those struggling with mortgages and charge a low lifelong rent, ensuring families do not face the disruption of losing their home but protecting government coffers.
One variation of this scheme would be to offer to purchase the freehold only of residential properties, and to charge annual rent to the leaseholders. This could simultaneously provide the immediate financial support the homeowner may need (perhaps because of their business collapsing) whilst giving the government a long-term revenue stream equivalent roughly to a land-value tax.
Clearly, this approach would only be helpful for those with existing housing assets when those who have suffered most in the pandemic would not have those and would generally be renting from private or social landlords. As it stands, there are currently 700,000 renters are in arrears, a looming social and economic crisis.
Government should offer all existing landlords the existing market price for their property. This policy should coincide with the pre-announcement of sharp increases in taxes affecting landlords, including capital gains tax and council tax, to take place in coming years. This should incentivise existing landlords to put their properties on the market in advance of the taxes coming to effect.
A more radical alternative is for compulsory purchase orders (typically only applied when authorities need to buy land for infrastructure projects such as HS2) to be used for this purpose.
This approach puts money into the economy in the form of big one-off payments to existing landlords, provides rent relief and housing security to low-income groups and gives the government an asset, strengthening the public balance sheet.
It’s not just win-win, it’s win-win-win.
From a fiscal stability perspective, increased government debt is far less of an issue if it coincides with increased government ownership of assets. This is a logic understood by BTL investors and should be ruthlessly exploited by the UK Government especially since owning increased land and property can help the government achieve policy objectives such as keeping business rental costs low and helping low paid renters.
Instead of such imaginative policies, we were given the dreary extension of the Tory-voting home-owners subsidy known formally as the ‘stamp duty holiday’, a policy which is morally every bit as corrupt as any of the PPE or test and trace procurement scandals.
On a separate note, we also got an extension of the furlough scheme, a policy which has reached the dreaded “national treasure” status, whereby any hint of criticism or scepticism is enough to cast doubt on your intentions or character.
The alternative stimulus
For the past year, the conservative government has been embarked on the most substantial intervention in the private economy at least since the second world war and plausibly in UK economic history.
The central aspect of market intervention has been through ‘furloughing’, which has accounted for approximately £100 billion so far, an amount which is only likely to continue. There were many months in 2020 when more money was being spent on furloughing than on the NHS.
What is most extraordinary about this intervention, even more so than its size, is that when you strip it down to bare facts, the money was spent on paying people…………………..to do nothing.
They did not have to sign on at a welfare office, volunteer their services for assisting vulnerable groups or even provide any proof they were following social distancing regulations (the introduction of which was the justification for furlough becoming necessary).
Of course, the rationale was to avoid unemployment by ensuring companies which could receive no income would not either go bankrupt through such high ongoing costs or attempt to stave off this possibility by making large swathes of their workforce redundant.
Either possibility is too horrific to contemplate.
However, this does not mean that the exact scheme designed was the right approach to the problem. Before I go further, it must be said in mitigation that HM Treasury officials and Ministers had perhaps days to develop a policy to deal with the biggest economic crisis in generations. After this however, they would have had time to consider and analyse potential alternatives to the mass furlough approach, rather than continuing the approach an entire 12 months after first envisaging it.
The big weakness, and thus biggest objection to the ‘mass furlough approach’ is that many jobs apparently ‘protected’ are not protected at all — they will simply be lost in the general economic restructuring post-covid. For such jobs, it would have been far better to allow redundancies earlier during the pandemic, and to provide support to such affected individuals through higher redundancy payments and support to find new work.
This is probably easier written in a policy paper than said at a government dispatch box, but when dealing with £100 billion it is essential to take a sceptical rather than emotive approach.
With each job the furlough scheme impacted, there were three possible consequences:
i) Employer would have kept employee on regardless of furlough:
ii) Employer keeps employee permanently because of furlough.
iii) Employer furloughs employee but then releases employee post-furlough in the general economic restructuring.
In the above three cases, cases i) and ii) undoubtedly involve a complete waste of government money. In i), the costs of maintaining a valued employee without company revenue would have been taken on by the employer, and in iii) the furlough has just delayed the inevitable redundancy and need to find alternative employment.
Only in ii) could you say that government policy has achieved its objective, and even then, there is a secondary argument about whether this was the best approach to achieving this objective (i.e. the opportunity cost).
Of course, there is no reasonable expectation that the government can identify and target such furloughing so that it precisely achieves its objectives. Failure to do so is not my criticism. It is inevitable in such a blunt approach, which is the subsequent limitation of such a blunt approach. There havr been and are alternatives to the furlough approach, and it is weird that there has been limited discussion of this. Perhaps it would have been unreasonable for Ministers to develop these in the immediate crisis period of March 2020, but there certainly has been time in the year since then, and it is embarrassing that in March 2021 the Chancellor and his Treasury have been so intellectually unambitious.
The question is not the need for sizable state intervention but its form, and here there are several alternatives:
State direct investment in firms
The Government directly subsidising private sector employment is a blunt approach. Another equally blunt one is state buying equity (and even debt) in private companies. A difference is that this approach gives the government an asset, namely corporate shares, and future loan repayments.
This is normally considered absurd, the ideas of a 1970’s Marxist, which even Corbyn and McDonnell would run away from. Civil servants cannot and should not run private enterprises.
However, the fundamental assumptions behind the mass furlough approach is as followed:
a) The economy must essentially temporarily close down to allow the social distancing etc for COVID-19.
b) The government should not allow affected companies to completely collapse, throwing millions (if not tens of millions) out of work.
To be clear, I agree with those assumptions.
However, if you believe this you are inevitably acknowledging that unprecedented state intervention in the economy is required. The question then becomes how to intelligently implement such intervention.
You may not want to be a socialist planner, but you are one whether you like it or not.
It is best to admit you are temporarily a socialist planner and try and do things practically and ensure the best value for money. With that in mind, an alternative to furlough would be for the Government to buy shares in companies or give soft long-term loans to be paid back over decades, providing essentially a form of future government revenues in the loan repayments.
In this situation, companies would have ongoing costs to face in terms of paying their employees and covering rent payments (not withstanding my proposals re commercial rent mentioned earlier) but would have sufficient capital injections to survive as a business.
Given the specialist nature of this task, it would best if the government tasked a new body, a specially created government investment bank for this purpose.
We could even have a situation where the state outright takes over private companies such as British Airways, M&S and Next. Such businesses have brands, staff, supply chains and customer loyalty which makes them successful businesses in normal times. Although it would never be the first choice for a government to own them outright or even partially, it is clearly preferable to them going under and also provides assets for the government, a clear difference to the furlough scheme.
It should have been recognised by summer last year that barely any industry will recover and perform in the same way post-pandemic. Most obviously, the demand for air travel and subsequent finances of the airlines will not recover for years if not decades, meaning such a low-margin industry will undoubtedly see a range of bankruptcies unless action is taken.
With industries such as air travel, government ownership (often indirectly) is quite common in many parts of the world and has been in the UK in the past (e.g. British Airways was privatised by Thatcher in the 80s). Even conservatives must see that partial or even full state ownership is comfortably superior to the state subsidizing unsustainable jobs at ‘zombie companies’.
More bespoke arrangements should also be made for smaller companies (i.e. local cafes), with state-backed bankers make ruthless financial decisions on which have long-term viability and making very long-term generous loans based on such assessments. Crucially, this body would have the right (and even the incentive) not to invest in companies which they feel do not have a long-term future. This would inevitably mean more firms failing earlier. However, handled correctly, this is not the disaster it may first appear.
The UK has a long-standing productivity problem, a productivity problem which is to a large extent explained by poorly performing firms which have continued to exist partly due to long-lasting access to easy credit. Known as ‘Zombie firms’, such enterprises have now been propped up by fiscal support with the furlough scheme.
It is in the clear long-term interest of the UK economy for capital and labour to be reallocated to more productive firms. In plain English, this means investment and workers leave low productivity firms and move to higher productivity firms. This means cutting off support for firms with low prospects, whilst finding means to support rapid economic transition. Tax policy could support this by incentivising investment (such as the investment super-deduction) plus other incentives such as temporary reductions in employer NICs to encourage new hiring.
With many industries likely to be smaller post-covid, government policy should have been to encourage mergers and acquisitions to occur within specific industries, using its new state investment bank. Such economies of scale arising from larger firms could support enhanced productivity, an essential ingredient in our long-term economic recovery. However, the main driver of productivity and our economic recovery will always be investment.
Facilitating and supporting Investment
In simple terms, increasing investment, either through direct public investment or subsidising private investment, is far superior to furlough, since investment adds to the long-term growth prospects of the country rather than subsidising stagnation.
On the tax-side, the investment ‘super-deduction’ or an equivalent should have been introduced in 2020 during the many opportunities Sunak had to introduce such a policy.
However, direct government investment should have been the primary accelerator. A major part of such investment would simply have been bringing expenditure forward so that it takes place at a time when the economy requires stimulus rather than in years to come. Government departments have capital expenditure budgets for coming years (i.e. the Department for Education would have plans for capital spending on schools over coming years) and these can be brought forward whilst not being increased overall.
Given our national need for more housing, speeding up house-building plans through a more direct role of the state in funding house building would have been an effective short-term stimulus and long-term investment. The covid crisis could have been used as an opportunity, and still could be, to overcome standard local objections to new housing. Proponents of new house building can exploit the scale of the national crisis to denounce as offensive the standard NIMBY-style objections. From a more cynical perspective, social distancing regulations and stay-at-home guidance can be exploited to make protesting against local house building legally impossible.
The most effective investments in terms of long-term productivity and living standards arise from industries such as technology, science and pharmaceuticals. The UK has historic and current strengths in these sectors. An immediate policy would be a temporary expansion of government research and development grants.
There are separately more run of the mill expenditures which policymakers tend to overlook, do not attract big headlines or attention, and could also be done with social distancing respected to some extent.
Pothole removal: The 2020 budget saw the establishment of a £2.5bn Potholes Fund, which will see £500M released annually through to 2024/25. This should have been done in one go, spent over the spring of 2020, during a period when the roads were naturally less-used due to covid restrictions, and where the cash injection would have been most needed.
Road reconstruction and pavement works: As with potholes, these are investments which must be undertaken at some point and are best done during a period when roads and pavements are less utilised and when the economy most needs the investment.
Railways: In addition to continuing with HS2, plans for line electrification over the UK can be accelerated, exploiting the reduced use of the railways.
Continuing on the transport theme, projects as simple as refurbishing bus stop shelters and railway stations, possibly employing local artists, would help refresh our urban centres.
LED street lighting: Many councils have commenced or have long-term plans for this. Saving money and energy in the long-term, this is exactly the type of investment which could be rolled out nationwide.
Installing electric-charging point for electric vehicle: Government could have worked closely with industry to rapidly accelerate the installation of such charging points, an investment which would naturally stimulate further investment in the electric vehicle industry. Again, it is expenditure brought forward with significant returns.
Double and triple glazing for homes and offices: This provides money to window companies and their workers/contractors plus provides a long-term saving in energy bills to the resident.
Deep cleaning, renovating and painting all government buildings: Given such buildings are empty, this would have been the opportune time to undertake such work across all government buildings. The government could subsidise such a scheme for the private sector too.
I gladly accept that many of the above ideas read like modern equivalents of the rather naff John Major cones hotlines of the mid-90s, but collectively they are effective use of public expenditure both in terms of short-term stimulus and long-term investment.
The logic of such investments is that the government can borrow money at (generally speaking) zero interest rates, whilst such investments detail above save money in the long-term. However, there is one set of investments which should have been prioritised above all others and would have an effective short-term impact.
Investments in COVID-secure workplaces
Over the last year, we have learned that good ventilation is essential, and that Covid-19 is far less likely to spread through the open-air. Given we know this, why has the government failed to legislate for all pubs, restaurants, shops and offices to have all doors and windows opened at all times and to have new and advanced ventilation equipment installed?
An effective stimulus would have been to directly pay builders and window installers to undertake the required physical renovations at all shops, restaurants, pubs and offices across the UK. This should have been done before the reopening in May 2020 and would have been a far more effective use of public money than the nearly £1 billion pissed up the wall on ‘eat out to help out’, a policy which singularly justifies a new crime of gross incompetence in public office.
In addition to more windows and open doors across all open businesses, eating and drinking places can be redesigned with clear physical barriers between different tables. This can be as simple as clear glass or plastic screens which are withdrawn post-Covid.
Public spaces, such as parks, can be appropriated for temporary use by the hospitality sector. Last summer, we should have temporarily licensed restaurants, bars and cafes to operate in specially designated parts of public parks. This could be a simple as mobile beer dispensers and deck chairs under marquee style tents. We should not repeat our failure this summer.
A similar failure has been seen in our preparation for school reopening. Given school children are most unlikely to effectively follow social distancing (as would be understood by anyone who has either had, been or even bloody met a child), a Keynesian-style work programs should have been implemented to Covid-secure schools to the greatest extent possible.
This includes ventilation equipment in each classroom, large windows installed, barriers installed between school desks plus the large tents and other temporary structures to allow emergency classrooms to be installed on school playing fields.
Such expenditure would have provided short-term support to building industry and long-term protection against future airborne pandemics, making it a prudent public investment (since evidence suggests that they are likely to occur and in fact we were lucky not to have prior to 2020).
Investment in skills
Regardless of the measures taken, we were faced with a situation of many millions staying at home unable to work since their jobs cannot be done from home (i.e. hospitality jobs). Such people have short-term financial needs which must be met, may not have jobs to go back too and cannot realistically find new employment at this time.
A very effective use of their time, given their need to socially distance, would be to equip them with new skills and qualification which our economy needs. It would be wise to link state income support payments to undertaking new skills and qualifications, providing people with an incentive to undertake qualifications which also help the economy in the long-term. In an era of online learning, there are a wide range of skills which can be learnt from home and are useful in a modern economy. Examples include:
· Graphics
· Games design
· Sewing, knitting and weaving
· Coding
· Counselling and mental health qualifications
· Creative writing
· Business administration and management
· Marketing
· Nutrition
· Foreign languages
· Cooking
Employers could have been co-opted into supporting such skill development, since they have a natural incentive to support the skill development of their staff. As with other investments, this is a short-term cost thus deepening the deficit in the short-term, but unlike furloughing it is cost with a long-term benefit in terms of future economic growth.
Hotels
Given the need to ensure minimal social interaction necessary to keep emergency services and other social services functioning, we face a public policy issue which can essentially be summarised as:
“How do we manage space?”
As in other areas of policy, we have got this wrong.
Hotels, which are designed by their very nature to accommodate people, and for which social distancing between different customers and staff is reasonably achievable, have been closed. Many will never recover from the financial damage, destroying viable businesses and individual careers.
An intelligent temporary solution would have been emergency legislation forcing them to remain open and provide temporary accommodation (funded by government) to individuals and groups for whom were best not kept in their usual residences.
This includes hospital staff, who ran the permanent risk of contracting covid through their work and then infecting family members at home.
Ex-footballer turned hotel owner Gary Neville showed more progressive initiative than any government minister (or even he did as a defensive right-back) by allowing the hotels he owned to be used by NHS staff. Such an initiative should have been scaled up across the country, meeting the dual objectives of providing benefits and protection to such NHS staff as well as supporting the cash-flow of such businesses. Of course, many budget/small hotels will find social distancing of this nature impossible, and they must therefore close and given protection on the same basis as other businesses.
There are other groups in this position, or a similar one. The risk to the Police (and subsequently their family members) has not been given sufficient attention. The same could be said of public transport drivers, whose continued service was essential, and supermarket workers.
Many would be worried about their families but be placed in a situation where due to a combination of employment concerns, financial insecurity and a sense of public duty were required to risk the lives of their families (and their own) for our society to function. This occurred whilst more privileged people (for clarity, I unambiguously include myself in this category) were able to stay at home.
Our taxes should have been used to give such groups a specific option, namely:
Stay in sparsely populated hotels, with social distance measures in place, and with your accommodation and food covered for the duration of the emergency. Many would not accept such an offer (i.e. if they had young children they had to look after etc), but many may have.
There are approximately 150,000 hotel rooms in London alone. That is an enormous capacity which should have effectively used. Given the need for sufficient space for social distancing, it is likely that in general the higher-star hotels (i.e. 3-star and above) would have been the most appropriate.
There are other groups who could have utilised such an offer for the benefit of themselves and for wider society. The crowded living conditions in many inner cities and council estates reduce the possibility of social distancing, a situation worsened further by the financial need for many to go outside to work.
Homeless packed into hotels, proving once and for all that homelessness could be tackled quickly, easily and cheaply if the existence of the homeless caused any threat or challenge to those in power. The next step up the social ladder from the homeless tends to be those living in cheap, crowded accommodation, whose living conditions and working patterns also conflict with social distancing requirements.
Likewise, it would make sense to extend the same offer to them– temporary free accommodation and hotel food in a 3,4 or even 5-star hotel instead of a crowded bedsit in a council estate in Peckham, Birmingham or Glasgow. There are good reasons to make the offer to more prosperous young professionals too, as an alternative to sharing properties with multiple people
With such hotels, it is very easy to monitor entry and exit, ensuring that social distancing regulations are being maintained.
Support to hospitality (Pubs/Café/Restaurants)
Hospitality is a big employer (admittedly of generally low paid and often insecure work), so it is right that there has been particular concern for this sector. So far, the debate has been rather limited, with a simple dichotomy between being open for business as usual or closed completely, with the partial exception of cafes allowing coffee takeaways.
Closing completely leads to substantial periods where revenue is zero, whilst costs (particularly rental and labour) are far from zero, leading to cash-flow concerns threatening the viability of the business. There are certain steps which could have been taken (and could still be introduced) to mitigate this.
One emergency measure to help restaurants and (particularly) pubs would be for the government to ban the sale of alcohol in supermarkets and have allowed pub and restaurant owners to buy current supermarket stock at supermarket cost prices and sell to customers to take away only.
This may initially sound drastic but has some serious merit.
Firstly, it gives pubs and restaurants a source of income during their closure.
Secondly, it does something to reduce the footfall in supermarkets which for the last year have been the only place for people to congregate in the same (often poorly ventilated) place, and thus the most likely places to spread covid.
The need to reduce our dependence for food and drink on the same crowded supermarkets places suggests equivalent policies for restaurants and cafes to sell non-perishable goods not requiring refrigeration. This would include bread, eggs, cereals, tinned food and canned drinks.
On both economic and public health grounds this should have been pursued. This could have worked alongside another creative alternative to the ‘mass furlough’ policy.
Consumer voucher scheme
A devastating cash-flow crisis for the hospitality sector (where fixed costs such as rent and labour continue whilst revenue collapses to zero or near-zero) coincides with a situation where many people have increased their savings (sometimes rapidly) during the pandemic. Retired people and middle-class professions whose jobs have been secure during covid have often seen their accounts filling up as their income has remained the same whilst their costs have plummeted (this author counts himself in this situation). They have been waiting to spend money in establishments which could have gone out of business by the time they are permitted to reopen.
There is a policy proposal which could effectively match the resources of such consumers with the cashflow needs of such businesses. The proposal involves the government topping up vouchers issued by hospitality outlets, thus providing a greater incentive for consumers to buy such vouchers. Currently, a consumer would have no incentive to buy a £20 voucher to go to their favourite restaurant, as they could just wait until it was reopened and pay £20 upon service.
However, a government top-up of (say) 50% would provide an incentive for such a voucher as the consumer could pay £20 in return for £30 worth of service in a month or two’s time when the restaurant was to reopen.
Under this proposal, an individual would buy a voucher directly from the business where it would support immediate cashflow. Under the scheme, vouchers would be returned to consumers if business closes, but if business is opened, the voucher cannot be reclaimed by the consumer, and must be used. At the point of use, it is claimed by the business, shown to the government (probably more specifically HMRC given their experience auditing company accounts) whereby a 50% top-up is paid.
This proposal has advantages over furlough by getting the population involved in the financial support of their favourite establishments. It also maximises the effectiveness of government support, with subsidies going to businesses which have the highest consumer demand and thus long-term viability. To both protect government coffers and to limit the extent such a policy can benefit those dining out at the Ritz, it would be prudent for the top-up to be limited to £25, meaning a practical voucher limit of £50.
An alternative employment subsidy
A desire to support continued employment is of course understandable. However, a superior alternative (possibly working alongside a reduced furlough scheme) would be to subsidise new rather than existing employment. This could partly be through a holiday from employer NICs for the first year of employment, but even through direct partial salary payment, (i.e. 25% of the new salary up to a maximum subsidy of £1,000 per month).
This would lower substantially the cost of taking on new workers. It is true that just as with the furlough scheme, there would be a deadweight loss from the policy (i.e. subsidising jobs which would have been created anyway). However, at least this is subsidising firms which are taking on workers and thus likely to have a future. This policy goes with the grain of markets and will be productivity enhancing by helping people move from jobs at failing firms to jobs at growing firms in growing industries.
Conclusion: A year of missed opportunities
In conclusion, there are intelligent and effective alternatives to mass furloughing, which ensure far better value for government and subsequently taxpayers. Furloughing is a blunt and expensive measure which should be limited to distinct sectors deemed essential to our national long-term interest. This includes manufacturing, technology, science and pharmaceuticals but certainly not ‘Katie’s café’ or ‘Barry’s Burgers’.
That we are a full year into the crisis and the government has missed opportunity and opportunity to apply a strategic economic approach to both relieving our immediate crisis and supporting post-covid growth is every bit as damning as their failures on health policy.
