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The UK is slowly emerging from the lockdown put in place to slow the spread of coronavirus. Large parts of the UK economy were shutdown, some continue to be so. The Chancellor’s summer economic update will outline economic plans to support the economy through the first phase of recovery.

On 30 June, the Prime Minister made a speech on the economy in which he announced that the Government would bring forward around £5 billion of capital spending including investment for hospitals, schools and transport.

Economic situation

The magnitude of the recession caused by the coronavirus outbreak is unprecedented in modern times. GDP was around 25% lower during the depth of the crisis in April than in February. In response, the Government and the Bank of England launched a wide-ranging series of policy interventions. These are designed to financially support businesses, workers and the wider public during the crisis.

While a recovery is underway, there is uncertainty over how fast economic activity will regain lost ground. Economic prospects over the near term will depend on the spread of the virus over the coming months, including whether lockdown measures are tightened again if cases grow.

In addition, a key factor will be how high unemployment levels will rise. Particularly important is how many employees currently furloughed will return to work and how many will become unemployed.

Public finances

This year’s budget deficit (the difference between government spending and income) is expected to be larger than at any time since World War II. Government schemes to support businesses and individuals are adding around £130 billion to the deficit this year. Lower economic output is depressing tax revenues, potentially by more than £100 billion.

The Government is borrowing record amounts to fund its deficit but is doing so at historically low interest rates. Low interest rates mean that government’s debt interest costs remain low. Relative to tax revenues, government debt interest costs are at a 320-year low.

Low borrowing costs have meant that there are few immediate concerns with government debt rising to over 100% of GDP for the first time since the early 1960s. Of course, if interest rates rise the Government’s debt may become less affordable.

The outlook for the public finances in future years is tied to the strength of the economic recovery. As the economy recovers the Government’s deficit will decrease. Tax receipts will grow and spending on support to individuals, workers and businesses will fall. The extent to which the economy recovers will depend on how much permanent damage – or scarring – there has been.

How could the Chancellor support the economy?

There’s plenty of advice being offered to the Chancellor about the steps he should take to stimulate the economy. Think-tanks, industry bodies, parliamentarians and other commentators have put forward suggestions including: extending and amending the furlough scheme; reducing the rate of VAT; cutting the cost of employer National Insurance; spending on infrastructure; subsidising wages in the hardest hit sectors; delivering a ‘green recovery’, and many more.

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