This is a fast-moving issue and should be read as correct at the date of publication (11.03.20).
The scale of the economic shock from the coronavirus (covid-19) outbreak is still uncertain and evolving. The Chancellor has said there will be “significant impact” but disruption to the economy is likely to be temporary.
In response, the Chancellor (in the Budget), and the Bank of England announced a series of measures to support public services, businesses and workers.
This Insight provides a summary of these policies.
How is coronavirus affecting the economy?
Prior to the outbreak, the UK economy was expected to grow modestly at around 1% during 2020. Employment levels are very high. The Government was expected to run a budget deficit of around £40 billion (2% of GDP) in 2020/21.
Chancellor Rishi Sunak, presenting his first Budget, acknowledged that the coronavirus outbreak would cause disruption to the economy. He noted that with potentially up to one in five workers unable to come to work and disruption to supply chains, UK business would not be able to produce as much as they had before the virus.
In addition, he noted that consumer spending – which accounts for nearly two-thirds of GDP – would be negatively impacted, partly as a result of some people being told to stay at home for public health reasons.
This highlights a dilemma for policymakers: encouraging consumers to go out and spend money may run counter to advice given to slow the spread of coronavirus.
What was announced during the Budget?
The Chancellor announced a series of measures designed to support public services and the economy during the coronavirus outbreak.
He described them as: “temporary, timely and targeted.” They can broadly be grouped into three categories and will cost approximately £12 billion in total (subject to take-up).
Additional NHS funding
Funding for the NHS and other public services to deal with coronavirus will be made available. The Government has set initial funding at £5 billion.
This will cover the cost of treating patients, funding local authorities to support social care services and funding other public services as needed. It would also provide money to research Covid-19. The Chancellor said: “whatever extra resources our NHS needs to cope with coronavirus – it will get.”
Loans and tax relief for businesses
Measures totalling £6 billion include:
- For one year (2020/21), businesses in the retail, leisure and hospitality sectors with a rateable value of below £51,000 will not pay business rates.
- The Government will cover the cost of statutory sick pay for companies, who would normally pay this, with fewer than 250 employees (for up to 14 days).
- Local authorities will be funded to provide around 700,000 small businesses currently eligible for small business rate relief or rural rate relief with a one-off grant of £3,000.
- The British Business Bank will launch the Coronavirus Business Interruption Loan Scheme, with loans of up to £1.2 million for small businesses. The Government will guarantee 80% of the loan.
- An extension of HMRC’s Time to Pay service, which allows eligible businesses to defer tax payments.
Statutory sick pay and changes to benefits
Those diagnosed with covid-19, or those advised to self-isolate, will be eligible for statutory sick pay from day one (instead of day four).
Individuals, such as the self-employed, not able to claim this but who are diagnosed with covid-19 or told to self-isolate, will see changes to contributory Employment and Support Allowance and Universal Credit to make it quicker and easier to claim these benefits. This will cost £500 million.
In addition, £500 million in funding is available to local authorities to help vulnerable residents. The Government says it expects most of this to be spent on council tax relief.
The Bank of England cut interest rates
On Wednesday morning, prior to the Budget, the Bank of England announced a package of monetary policy measures in response to the spread of Coronavirus. This included:
- A 0.5 percentage point cut in interest rates to 0.25%, the equal lowest they have ever been.
- A new Term Funding Scheme designed to ensure banks pass on the interest rate cut to businesses and consumers by giving them access to cheap loans from the Bank of England. The amount they can borrow is linked to the amount they lend to households and firms (especially small- and medium-sized ones).
- Lowering the amount of reserves banks are required to hold, in order to free up this money for lending to businesses.
Mark Carney, the Bank’s Governor, said the moves were intended to provide support to the economy in order to “keep firms in business and people in jobs.” The overarching goal was to “help prevent a temporary disruption [to the economy] from causing longer-lasting economic harm.”
What will happen next?
All these coordinated policy measures are designed to offer support for businesses and workers who are affected by the coronavirus outbreak.
The hope is that the economic shock is temporary, dissipating as the virus is brought under control. In this scenario, the policy measures announced today offer a bridge to the return of more normal conditions after the crisis is over.
However, the scale of the economic impact is not yet known. It depends on how far the virus spreads and the public health measures taken to arrest that spread.
In the event of a more serious than envisaged economic threat, both the Chancellor and the Bank of England stressed they would take further actions as and when necessary.
Spring Budget 2020: a summary, House of Commons Library.
Spring Budget 2020: Background briefing, House of Commons Library.
A British Sign Language version of the Budget Statement is available.
About the author: Daniel Harari is a researcher at the House of Commons Library specialising in UK and international economies.
Photo: The Budget 11/03/2020: Chancellor of the Exchequer Rishi Sunak Credit: ©UK Parliament/Jessica Taylor