Good news: the Chancellor will never see a worse month than April (bookmark this). Minus 20% is about x10 worse than the worst quarter in the GFC. Only way is up. But clearly huge challenges for Rishi Sunak as he works on HMG's recovery plans due to be set out in July (THREAD)
HMT view will be this isn’t a one shot game. Not all support needs to/should be unleashed asap. Big uncertainty as to path of recovery, needs an agile response. July “moment” best seen as the start w/ autumn Budget/SR also crucial, esp since tax measures likely to wait until then
Recovery package needs to do two things. Immediate task – and the priority – is to try to restore economy to as close to full potential as possible. But also need an eye on how to support the economy as it restructures longer-term. Should focus on 4 areas...
1/ Labour market. Economically + politically unemployment has to be no1 priority. It's the major source of long-term economic scarring, and the time bought by the JRS means HMG will have no excuse for not having a bold plan to tackle this by the time the JRS unwinds
Won’t know how big the spike will be until JRS unwinds but have to assume the worst. HMT will be sceptical about how effective labour market interventions are, but need to put all caution aside and show you tried everything. See this from @tonywilsonIES employment-studies.co.uk/resource/getti…
2/ Consumption. Big unknown at the moment is how willing we’ll all be to spend money as the lockdown lifts. Germans surprised a few people and decided not to wait to find out by going for a big VAT cut. See this from @MESandbu ft.com/content/29ddca…
HMT may wait to see if big pay down of h'hold debt during lockdown paves way for spending splurge as it lifts. So tax cuts may be for the autumn. Meanwhile key Q is if virus levels get low enough for HMG to send a +ve health message which gives people confidence to go and spend
3/ Investment. Lots of focus rightly on government capital spending but bringing lots forward soon will be hard: planning restraints, skills gaps, local authority capacity all potential bottlenecks. Big effort needed to unlock these but not politically straightforward to do so
And more focus is needed on business investment. UK has struggled with this historically, and this crisis will exacerbate that. Certainty of a deal on Brexit would help a lot, but also need to think radically on tax incentives too. See this thetimes.co.uk/past-six-days/…
4/ Business support. Lots of room for measures to allow business to operate more freely short-term, whether through changes to existing restrictions (e.g. the 2m rule) or easing of regulations in new areas (e.g. Sunday trading rules)
Long-term challenge is how to tackle the big increase in corporate debt as businesses borrowed to survive the lockdown. Some interesting ideas here voxeu.org/article/implem…
And some more good news to end. I'm not going to talk about fiscal consolidation + the fact we're all going to have to pay loads more tax, following widespread feedback from colleagues, friends, family and even my kids that I talk about it too much. In fact, the opposite is true
HMT orthodoxy is when you do a short-term stimulus you also need to show a long-term plan to consolidate. I don’t think this holds now. If anything what the economy needs now is certainty that the big fiscal reckoning won’t be coming any time soon /ends
