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Today's webinar focused on the future, or, more specifically, how to prepare the economy and the workforce for that future – and we had a brilliant panel to discuss it. There was Rain Newton-Smith, the CBI’s own Chief Economist; Elizabeth Foote, an Associate Partner at McKinsey & Company; and Helen Miller, Deputy Director and Head of Tax at the Institute for Fiscal Studies.
Here are some of the points they alighted on:
- The early success of the Bounce Back loan scheme
- Other issues with the government’s economic support package
- Fixing the public finances
- The new skillset…
- …and how to provide it.
The Bounce Back loan scheme
Yesterday saw the launch of the government’s Bounce Back loan scheme. What it promises is loans of between £2,000 and £50,000 (or up to 25% of a firm’s turnover, whichever is lower), with a 100% government guarantee, and a simplified application process. There is no interest, nor fees, nor repayments, for the first year. After that, there’s a six-year repayment term, with a fixed interest rate of 2.5% per annum.
As Rain said, this scheme fills “a gap that we and others had identified – partly driven by feedback from some of these webinars”. That gap being smaller businesses who were previously struggling to get cash through the government’s main Coronavirus Business Interruption Loan Scheme (CBILS). So far, Rain added, the new scheme “looks to have been hugely successful”.
The Bounce Back loan scheme might not just help smaller companies – it might also help bigger companies. According the latest figures, around 50% of the businesses who applied for loans through CBILS have received the money they wanted. That proportion is likely to rise now that there is a simper, quicker alternative for small businesses. “Bounce Back loans will take away some of the pressure,” explained Rain, “and help banks to focus on medium-sized businesses.”
Other issues with the economic support package
Rain mentioned one of the CBI’s current focuses: evolving the Job Retention Scheme (JRS) so that it works better for the restart period. “What sort of flexibility might we need to see in the JRS?” she asked. Part of the answer could be part-time furloughs for businesses that are slowly getting back to work, while full support continues for those sectors – “pubs, hotels…” – that are likely to be among the last to reopen.
But Rain also drew attention to another issue that is much less discussed: Trade Credit Insurance (TCI). Around 14,000 firms use TCI to support the financing of their operations and to help counter some of the risk around exports. It is likely to be a crucial part of many businesses’ restart plans.
However, the availability of TCI is shrinking by the day. There is a fear that, without government support, it will dry up completely. “This was also a problem during the global financial crisis,” observed Rain. “One of the solutions was a government scheme to help provide that insurance.”
The CBI is looking very closely at this – and at proposals put forward by the Association of British Insurers.
Fixing the public finances
Helen was unequivocal about the impact the coronavirus – specifically, the government’s expensive (but necessary) economic support package – has had on our public finances: “We’re looking at having the highest borrowing ever in peacetime. Just on JRS, we’re spending higher than we spend on police, on law and order, on the defence budget….”
This means, Helen added, that there is likely to be upwards pressure on taxes to pay off the accumulated borrowing – aka, the national debt – in future. “What’s interesting is that, even before the crisis, we already faced pressure to raise taxes – including an ageing population.”
What taxes could be increased? Helen suggested that, actually, it’s less about individual taxes and more about the “structure of the tax system”. She continued: “We have a system that creates more distortions than it needs to. We could raise the same amount of money with less pain – and that’s a problem.”
One such distortion, she said, is the gap between the taxation of self-employed people and the taxation of traditional workplace employment. “Employer National Insurance Contributions (NICs) and the fact that these happen for employment contracts – but not for self-employment contracts – create a huge wedge.” Her point was that people and businesses should be able to make employment decisions for personal and commercial reasons, “not taking jobs that are manipulated by the tax system”.
Rain agreed with this point, but added that “the challenge is always a political one”. Philip Hammond, the former Chancellor, tried to align the taxation of employment and of self-employment, but “he came a cropper because, in part, it had been a manifesto commitment not to increase taxation around NICs, so he had to reverse that policy”.
The new skillset…
Elizabeth described some of the workplace skills that will be particularly beneficial during the months and years of recovery and renewal: “supply chain resilience and the data-management skills that requires”; “digital, remote working”; “virtual sales instead of in-person sales”; “leadership skills”.
Upskilling people for the new landscape is going to be particularly important because of the types of people who are losing work now. “We were already seeing a disproportionate effect on those in occupations with lower wages,” said Elizabeth. “We’re absolutely seeing an acceleration of this now. Our analysis from the US shows that 98% of those in vulnerable jobs are actually on a wage that is lower than a living wage for a family of four.”
She continued: “This is an opportunity to focus minds and to double down on that training and upskilling.”
There are benefits for businesses, as well as for employees and the unemployed. “Upskilling does pay,” said Elizabeth. “In most cases, in terms of performance benefits, it does pay to train someone rather than bringing in someone else from outside.”
…and how to provide it
Before providing training, businesses should work through a checklist first, said Elizabeth: “What are the value-drivers of my business? What, then, do I need in terms of skills? What skills so I have right now? And how do I fill the gaps between what I need and what I have?”
But when it comes to the training itself, there is evidence that some forms work better than others. Elizabeth said that “modular, bitesize learning” is best suited to “the kinds of skills we’re talking about”. Employees benefit from courses that are broken down into chunks, fit easily into the working day, and can be returned to again and again.
Rain also pointed out that the government has recently set up an online portal to help provide training while – or even while they are not – on furlough. That’s available at www.gov.uk/theskillstoolkit.
Key questions we answered:
- Rain, I believe several key CBI economic surveys were released last week. Are you able to give us a brief rundown of those?
- We published our Growth Indicator last week - providing greater insight into private sector activity. Unsurprisingly, activity fell at fastest pace since the financial crisis over last three months, with expectations for the next three months at all-time lows.
- It also showed the economy operating significantly below normal capacity, with a weighted 43% of businesses experiencing a total shutdown of UK operations.
- Over a quarter of firms (in weighted terms) experienced shipping delays, while more than 25% of firms experienced shortages of goods or materials.
- The findings chimed with Deloitte’s CFO survey (released yesterday) - showed CFOs expect revenues to be 22% lower, on average, than pre-COVID plans this year.
- The survey indicated that CFOs are overwhelmingly positive about government and Bank of England measures to support business, with a particularly positive view of the JRS.
- We understand that the harsh reality is there is a proportion of workers on the JRS scheme who are effectively unemployed. How big an issue is this for the government?
- Unfortunately, there will be some people who, when the JRS unwinds, won’t have jobs to go back to as they will not be viable as this crisis subsides.
- You don’t want to remove support too quickly as some of those jobs, currently in hibernation, will be viable when the economy returns.
- However, you also don’t want the scheme going on for too long as it may end up hampering the recovery. So, a flexible approach is needed.
- For those who are unemployed, we need to taper the scheme so that there is a passage back to employment.
- In addition, under the current scheme, there is no incentive to bring people back to work in a staggered fashion, e.g. three days a week.
- What are the fiscal implications of ramping up government spending due to the COVID-19 pandemic?
- We are looking at having the highest government borrowing levels during peace time.
- The amount of money we spend on the furloughing scheme alone will be bigger than what we spend on our entire policing and defence budget. This expenditure has been accrued in a few months.
- There will be pressures to increase taxes to manage the debt, at least in the short term.
- We have an ageing population that is demanding more expensive health and social care.
- On the question of who pays to manage down the debt we will have, do you see a potential to return to the debate on how we tax multi-nationals?
- If we do want to get serious about paying for an ageing population, we are talking about spending many billions of pounds.
- This will bring back the debate on how much companies should foot the burden.
- There will be a renewed interest in wealth taxes and those who are better off.
- I think we will also have a new angle on who has done well and badly out of this crisis. Many multi-national companies have done well and badly out of this crisis.
- On skills, what do you think will be the effect of this crisis in the medium to long term?
- I think this crisis will exacerbate some of the longer-term trends we saw in skills before it emerged. I think it will also exacerbate some of the demographics that were disproportionally affected by the skills shortages.
- After this crisis, I think we are likely to see a focus on supply chain resilience, including data analysis and assessment skills you need within that.
- Digitally enabled remote working will be key going forward.
- We also expect to see a faster displacement of automation of in-person manual jobs, as well as a rise of e-commerce channels and virtual sales as opposed to in-person customer sales.
- We’ll also likely see an increase in the need of leadership skills to navigate the challenges we will face.
- Before the crisis, we were seeing a disproportionate effect on occupations with lower wages. These were the occupations in general decline. We are now seeing an acceleration of this.
- McKinsey’s recent analysis found that for vulnerable workers in the US, 98% were in jobs paying lower than the living wage for a family of four. In Europe we see 80% of people not having a tertiary degree.
- This is an opportunity to grapple with the training and up-skilling challenge.
- What needs to change for us to grasp this challenge in the UK?
- We need a cultural shift away from thinking that education and training is about learning up to the age of 21, to a culture of lifelong learning.
- It isn’t shameful to say that you have a gap in skills as an adult, it is a normal part of the workplace.
- We also need to recognise that upskilling does pay. Analysis we conducted last year shows that in most cases, for moderate performance improvement accrued by training, it does pay to train someone internally than to higher someone externally. It is cost effective for a business.
- Modular, bitesize training does yield benefits, so it is important to recognise what the right kind of training is.
- How do you envisage our tax system evolving out of this crisis?
- We have a tax system that creates more problems and distortions than it needs to. We could raise the same amount of money with less pain.
- Taxation of the self-employed is an example. For many decades they have had lower tax rates than employees. That system is unfair because people are getting the same public benefit without the same taxes. In addition, this creates complexity and distortions.
- Philip Hammond tried to increase alignment between the self-employed and generally employed. But he was unable to make that adjustment as he came under political pressure.
- We do not want to discourage people from setting up a business, but we should have better alignment between the employed and self-employed.
- We should want people to make business decisions based on their own circumstances, not the tax system.