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Summer Economic Update

You can download the slides from the presentation by clicking here.

 

Opening comments – Summer Statement 2020

Paul Johnson

Welcome to our analysis of yesterday’s summer economic statement

My colleagues Carl Emmerson, Rob Joyce and Helen Miller will run through the main elements of the package unveiled in a moment. Let me start with some brief context.

This was another big package. In normal times, even in a normal recession, we would have been taken aback by the scale of measures announced outside of a budget. Up to £30 billion of measures plus £33 billion of public service spending not previously accounted for.

But, of course, this is no normal recession. It’s the deepest in history.

This was as the chancellor said the second, but not final, act in his response.

The first involved spending huge amounts – over £130bn – essentially to respond directly to the virus and preserve the economy as it was. Given the lockdown this was necessary. And being largely about giving money out was relatively straightforward. You can disburse £60 billion through a scheme like CJRS or add £8 billion to the welfare bill quite easily.

The second and subsequent acts are much trickier to deliver and get right. They need to get the balance between preserving those parts of the economy which have a long-term future and helping the transition to a new normal. They also need to actually deliver goods and services and change. That is very different from simply disbursing cash. This phase needs to get several things right.

First there’s timing, timing, timing:

  • Timing of when to withdraw support and how quickly. The CJRS can’t last forever. The Chancellor had already settled on a gradual withdrawal through to the end of October. We simply can’t know whether that will be too fast or too slow;
  • Timing of when to introduce stimulus measures like the VAT cut for hospitality. Maybe it would have been better to wait until we know whether the real problem is on the demand side – people need to be encouraged to go out and eat – or on the supply side – with social distancing restaurants can’t serve enough people;
  • Timing of when to withdraw the new stimulus measures. Will withdrawing the Stamp Duty holiday next March be too early if the economy and housing market are still in the doldrums?

Then there is scale:

  • How much is needed? Is £30 billion enough?
  • How much can be delivered? This is a better question. It’s much harder to run a kickstart scheme and make sure it is effective than it is to deliver CJRS. The same goes for energy efficiency programmes, apprenticeships and so on. It is not enough to say the spending and programmes should have been bigger. You need to be sure you can deliver them. Even at the scale announced this will be challenging.
  • Normally we’d also be asking what can be afforded. Today the question is better posed as what is needed and what can be delivered.

Finally, there is the issue of value for money and additionality. Even in a crisis we shouldn’t ignore the basics:

  • A lot, probably a majority, of the job retention bonus money will go in respect of jobs that would have been, indeed already have been, returned from furlough anyway;
  • Much of VAT cut and stamp duty cut will be deadweight;
  • Committing £15bn for PPE may be necessary, but we can expect expensive equipment.

I expect the next phase, in the Autumn budget, still to be looking to support a recovery. We will know more then about the progress of both the virus and the economy. This should allow for more targeted support. Perhaps more targeted tax cuts, more thought through investment programmes, more developed job support schemes. And, of course, a spending review.

The time to pay for all this will come. But not this year and not next. Our capacity to do so will depend above all on how the economy recovers.

So, our focus today, like the Chancellor yesterday, will be on this support and recovery phase. But let’s hold in the back of our minds that a reckoning, in the form of higher taxes, will come eventually.

 

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On Wednesday 8 July, the Chancellor is due to deliver a Summer Economic Update, where he is expected to announce further measures to help the recovery from the COVID-19 crisis. We will publish analysis of the Chancellor's proposals and reforms as well as an examination of the public finances on this page.

On Thursday morning at 9:30, Paul Johnson will be joined by IFS deputy directors Carl Emmerson, Helen Miller and Rob Joyce to present their initial analysis of the trade-offs that the Chancellor has made at a free online event, focusing on support for households, businesses and public services and the impact on the public finances. This event will be broadcast live on this page.

You can sign up to receive an email reminder when the event is about to start by clicking here.

 

Background

 



Our analysis of the Summer Economic Update is funded by UK Research and Innovation (grant no. ES/V00381X/1). We are also grateful for funding from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy (ES/M010147/1).

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