Daily Coronavirus Webinar: Preview of the Chancellor's statement

Overview:

Today's webinar took place on the morning of the Chancellor’s latest fiscal statement – and we had a great panel to discuss what they’d like to see within it. There was the CBI’s own Chief Economist, Rain Newton-Smith; Isabelle Maddock, the Chief Financial Officer of the advanced papers manufacturer James Cropper; and David Gauke, who is currently Head of Public Policy at Macfarlanes but has also served in various ministerial positions, so he knows exactly what goes into a day like today.

Here are the key takeaways:

• The economic outlook
• Looking ahead to the Chancellor’s statement
• The importance of supporting young workers…
• …and older ones, too
• A new future.

The economic outlook

Last week, the Bank of England’s chief economist, Andy Haldane, gave a speech in which he suggested that the UK economy is healing “sooner and faster” than many analysts previously anticipated. He even raised the possibility, again, of a V-shaped recovery.

Rain, who worked at the Bank of England before joining the CBI, addressed Haldane’s speech in her opening remarks. “The fall in output is going to be, on one level, catastrophic,” she explained, “but maybe not quite so bad as some of the scenarios expected.” One of the reasons for this is that “we started to open up the economy” sooner than most of the scenarios accounted for.

She added: “If there is a ray of light, it’s that the worst is behind us.” There are now some positive signs around consumer demand, as well as around the resilience of the manufacturing sector.

But, Rain emphasised, “the severity of what we’ve seen is unprecedented”. Retail sales, despite picking up, are still “at least 40 per cent” of their usual levels at this time of year. “Air travel is down over 90 per cent. Same for air travel. These are figures that just don’t fit on charts anymore.”

There are many challenges ahead – and the main one, said Rain, is “where we end up on employment”. She likened the unemployment curve to the familiar coronavirus curve: it needs to be flattened.

Looking ahead to the Chancellor’s statement

What more will be done to flatten the unemployment curve? With Rishi Sunak’s statement happening only a few hours after our webinar, we were to have answers soon. “Jobs are key,” said David, “and I think that’s going to be the focus for the Chancellor.”

Of course, some of the Chancellor’s new measures have been trailed in the newspapers in advance. There was general support among our panellists for the idea of a “Kickstart Scheme” to support jobs for young people (see below for more). And David said that it is “sensible” to increase the number of staff in Jobcentres.

But our panellists also made additional demands. David would like the government to reduce the National Insurance Contributions (NICs) that have to be made by employers: “Employers’ NICs is a jobs tax. If you want more employment, you ought to lower the tax on it.”

In fact, David suggested that “at this stage” he’d prefer the government to deliver NICs cuts than some of the demand-side measures, such as VAT cuts and vouchers, that are also being mooted. His reasoning is that it may simply be too early to stimulate demand: “I think what’s holding back demand at the moment is concern about the virus – people don’t want to go out to pubs because they’re concerned that they might pick up the virus… or spread it to someone else.”

Rain supported this thinking, saying that generalised VAT cuts “might not be the best lever for us to try right now”. However, she did also suggest that “targeted VAT cuts for certain sectors”, such as the restaurant trade, “might be better”.

Rain also called for “more action on supporting businesses themselves,” and highlighted two of the CBI’s policy priorities in this area: a reduction in Business Rates and greater provision of grants to struggling sectors.

The importance of supporting young workers…

The new Kickstart Scheme, which will be properly announced in the Chancellor’s statement, will provide a total of £2 billion to subsidise jobs for young people. Rain explained the specifics: “The government will be covering 100 per cent of National Minimum Wage for 25 hours (a week) for six months.”

“This will be really important,” she went on to say. “It’s a huge incentive for companies to take on young people” – whose prospects have been disproportionately affected by the pandemic, in part because many of the sectors where young people traditionally work, such as hospitality and leisure, are among the worst hit.

But the Kickstart Scheme could be important in a different way, too; in signalling a change in the government’s thinking. So far, Rain said, the major employment support measures – namely, the Job Retention Scheme (JRS) – have been about “subsiding people to stay at home”. This new scheme is “subsiding people to stay at work”.

Rain wondered whether this could be continued in future; perhaps, she said, “you could have a system where [the government is] paying 10 per cent of wages…. That sort of marginal subsidy can just help at the margins to make sure that more jobs are protected.”

…and older ones, too

Isabelle also voiced her support for the Kickstart Scheme and for youth employment in general – “they have so much to bring to the business”. But she also added some important caveats.

The first concerned the 16-24 age range of the policy: “I think of young people as being probably aged 16 to 35.” And then she expanded beyond even that age group: “In order to grow in the future, we need to be embracing the workforce at every generational tier.”

These concerns are most acutely felt, continued Isabelle, when it comes to training. Her company, James Cropper, “will just continue apprenticeships in the best way we can” – but she also emphasised that apprenticeships are a “long game”, where it can take years of investment until a business really feels the benefit of having a fully trained employee.

What many businesses need is to train and retrain their existing employees – “no matter what age they are” – to meet the challenges of the Covid environment. “Safety training is so important,” Isabelle said, “so is leadership and management training.”

“If the government can provide investment in people and training here and now, so we can make the changes we need to come out of this, that would be massively useful.

A new future

David raised the prospect of two significant, broad changes in the near future.

The first concerns the government’s approach to jobs. Until now, that approach has effectively been to “freeze the jobs that were there at the beginning of the crisis”. But, continued David, “when we come out of this crisis, consumer demand will be different – so the mix of jobs will have to be different, too”. The solution, to some extent, will involve “[making] sure that the labour market isn’t so rigid that companies are… forcing people to do jobs that, in reality, don’t exist”.

The second concerns the Conservative Party and its internal dynamics. David has no doubt, he said, that “bold measures today [in Sunak’s statement] will have a lot of support”. But, in the longer term, there is a debate brewing over how much spending and borrowing the state can sustain – “and how do we reduce it?”

Key questions we answered:

1. Rain, do you agree with the Bank of England’s view of a ‘V’ shaped economic recovery, and that the economy has recovered faster than expected?

• I agree that the fall in activity in Q2 may not be as large as first feared – a fall of 20-25%, but not the 35% that Office for Budget Responsibility (OBR) first suggested.
• Andy’s argument uses ‘high-frequency data’ like Google searches and restaurant bookings, and I’m not convinced this will translate into spending in the same way as in the past.
• But in a way, the growth in Q2 this year isn’t interesting. We know that the peak impact on unemployment is likely to be at the end of the year, and this is what will matter most.
• I think it will take several quarters for the overall level of output to return to what it was.
• What matters now is that we flatten the curve of rising unemployment in the same way we did with the virus. This is where we are looking to the Chancellor to take more action to support businesses to help create more jobs around the UK.
• The latest figures show that almost 9m jobs have been furloughed, around 25% of the total number of UK jobs. And businesses have told us what a lifeline this scheme has been to them and their employees. But sadly, more job losses are being announced every day.

2. Rain, what will the Chancellor announce today and what would you like to see?

• Today the Chancellor will announce £2bn for a Kickstart Scheme. Under this scheme, employers will be able to offer a six-month work placement for young people aged between 16-24 who are claiming Universal Credit and at risk of long-term unemployment – with the government covering 100% of the National Minimum Wage for 25 hours a week.
• These jobs will give young people the opportunity to build their skills in the workplace, and to gain experience that will improve their chances of finding long-term sustainable work.
• He’ll also announce a £3bn package of measures to boost investment in green jobs and technology.
• These are both things we have been calling for. But we also hope that the Chancellor does more to help businesses survive over the next six months.
• While loan schemes have helped, around 70% of businesses still reported cash-flow difficulties in our May survey. We’d also like to see the Chancellor take more action to extend the grant support to SMEs through local authorities. And finally, a three-month business rates holiday across all sectors.

3. Rain, could VAT cuts and other measures help to stimulate demand?

• If ever there is a time to try out new ideas, it is now.
• We brought in a generalised VAT cut after the last global financial crisis, and it was temporary but effective. But it may not be the best tool now, because inflation is very low. So, a VAT cut would push it even lower.
• Targeted VAT cuts for the hardest-hit sectors such as hospitality and leisure would be helpful.
• Businesses are still facing high fixed costs. It costs more to reopen with all the safety measures required and reduced activity. So, you could provide a business rates holiday for all sectors to address this.
• Finally, providing more grants and extending the current systems could help.

4. David, what could the government do to stimulate demand?

• The advantage of a VAT cut is that it can be done quickly. It makes some things cheaper and it leaves more money in people’s pockets so it may stimulate consumer spending.
• I think that a lack of confidence is primarily driving down consumer demand, and so there is a limit on what the government can do to boost demand.
• There will be nervousness in the Treasury, as everything the government has done until now has been to freeze the jobs that were in existence at the beginning of this crisis. But these jobs will be different as we exit this crisis. The challenge is to provide the necessary support in the months ahead for those sectors that have been badly hit.
• The government will probably err on the side of maintaining jobs rather than letting market discipline come into effect.

5. Rain, do we need an extended furlough scheme for specific sectors?

• We know the Job Retention Scheme has been a huge lifeline for businesses and jobs. It has played a huge role in flattening the unemployment curve. But we cannot keep it going forever, so it’s right to taper it off.
• The government may consider a targeted version in the autumn. But we need to focus on a scheme for young people.
• Can you have a smaller subsidy for the worst-impacted sectors such as hospitality and the arts? Such as paying 10% of wages to lower the costs for businesses and keep people in work. That way, instead of subsidising people to stay at home, you are subsiding jobs being retained and economic activity.

6. Isabel, how would you like to see young people supported over the next few months?

• The Kickstart Scheme will be crucial, as the government will be paying a young person’s wages for six months – creating a huge incentive for employers to take on young people.
• Businesses want to hire young people, but it is hard as training is made far more difficult due to people needing to work remotely. Therefore, businesses cannot provide the support they would normally provide to new employees to bring them up to speed. This is having a big impact on employers’ confidence to hire young people.
• Therefore, a wage subsidy would make it easier for businesses to create these roles.
• Young people will carry the economic scars for longer throughout their working lives.

7. Isabel, what further support do you think is necessary from the Treasury?

• There are certain regions that have been badly hit due to their primary employers being those that are worst affected by the crisis – and these regions need support.
• We need government support for training through apprenticeships and more short-term measures.
• Companies need to be able to spend money on training here and now, and the existing Apprenticeship Levy does not lend itself to that.
• Cultural training is also needed on diversity, inclusion, and safety. If the government can invest in people and training here and now, it will help businesses to come out of this crisis.