Ryan Bourne: Sunak should not and cannot try today to restore pre-virus Britain. It’s gone – and we must now adapt.

7 Jul

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

Rishi Sunak earned plaudits for his dealing with the immediate economic fallout from Covid-19. Yet today’s summer statement presents a thornier challenge than playing Emergency Santa, dishing out funds to keep businesses alive. For today requires taking steps to further facilitate the “normalisation” of economic life.

Boris Johnson waded into economics last week, arguing (rather conveniently) that the Coronavirus highlighted the need for his pre-pandemic “leveling-up” agenda. Exactly how Covid-19 proves the need for, say, HS2 is unclear. But underpinning the Prime Minister’s argument was an assumption that, post-lockdowns, we can get back to focusing on pre-virus priorities – in the Government’s case, state-led economic rebalancing.

Similar “back to our future” thinking underpins business representations ahead of this statement. From calls for taxpayer-financed high street spending vouchers, to VAT cuts for hard-hit sectors, the prevailing discourse appears to be “now the virus is less of a threat, let’s incentivise returning to normal activity,” with “normal” meaning “what happened in early March 2020.”

Perhaps it’s because I’m in the U.S. and so have been to this reopening BBQ before, but I bear bad news: while the UK can expect a relatively sharp bounce-back in things such as retail activity, “normalisation” will not and should not mean a return to the economy of March 2020.

Before a vaccine, consumers will go where they feel safe, businesses from restaurants to cinemas will be supply constrained by social distancing, and certain behaviors (from the demand shift from restaurants to supermarkets, to the supply shift to working from home) will partially remain. That will bring major reallocation costs: businesses will close and lay off workers, while other sectors grow.

It was understandable that the Chancellor, not knowing which businesses would be viable after lockdown, set up a furlough scheme to avoid companies and jobs perishing. This helped protect important “job-matching capital” and “firm-specific capital” – i.e. people doing jobs they are good at and firms as important bundles of productive relationships. But one risk was always that businesses would interpret support not as mere lockdown relief, but a commitment to ensure their survival through the whole pandemic.

Some aspects of the campaign for arts subsidies, rumblings by MPs for ongoing aerospace supply-chain support, and the Resolution Foundation’s gimmicky “high street vouchers” idea suggest that some now do believe the Government should support sectors, even after full re-openings, precisely because consumers would otherwise continue to reject them, preferring not to fly as much, attend as many in-person events, or go to fewer restaurants or stores.

This is a very different policy proposition. Attempting to keep the March 2020 economy preserved as some eternal truth would mean workers and funds not being where businesses and consumers actually value them given today’s circumstances, bringing large economic costs beyond the fiscal.

For example, if more professionals now work from home semi-permanently, then tastes will shift from buying lunches within cities to local delis, online, or at supermarkets. Hence why Pret is laying off workers.

But as Julian Jessop has said, the purpose of economic policy should not be to protect Pret jobs. What normalisation should instead mean is the return to a functioning market economy where the rise and fall of businesses depends on their ability to meet our wants and needs in today’s circumstances. Sunak’s aim, in other words, should now be “market-led adaptation to the virus.”

We want businesses to figure out how to serve us in safe, cost-effective ways. The alternative – having the government tilt activity towards our early 2020 preferences – would not only encourage activity worse from a public health risk perspective, but also inevitably subsidise much that would take place anyway.

So Sunak should today reject “painting by numbers Keynesianism” that sees industry spending collapses as holes taxpayers should help fill in. He should snub VAT cuts or vouchers. If, with the virus still around, people would rather spend money on food to cook at home, Netflix subscriptions, and a hot tub for the back garden over restaurants, cinemas, and trips to the Lake District, workers and capital should flow accordingly. Economic activity serves consumers, not vice versa.

That’s not to say government cannot make this process less painful. But we need to be clear about the challenge we face: a supply-side shock we hid with relief. New realities mean workers in the wrong jobs, businesses serving customers in the wrong ways, and capital in the wrong places. Government policy should focus on removing barriers that gum up businesses, landlords, workers and entrepreneurs adjusting.

Sunak appears to get this on the worker side. He is tapering the furlough scheme gradually to give businesses breathing room, but inevitably those with newly uneconomic business models will make some permanent layoffs.

It’s crucial to try to get workers reallocated into new roles quickly to avoid the scarring effects of unemployment. Direct financial incentives for new hiring, even beyond subsidies for traineeships trailed in the papers, would encourage this. The reported plans for expansions of jobcentre capabilities are important too to try to speed up the matching process of unemployed workers to new roles, as would re-training efforts be. Some U.S. states are rolling back licensing restrictions on people shifting to different jobs too. With child-care difficult to come by, now would be a good time to review the UK’s oppressive childcare regulations, for example.

Yet the Conservatives should do more to facilitate the adaptation of businesses as well. Repurposing premises to earn consumers’ confidence often requires upfront investments that the Chancellor should write-off entirely for the basis of tax, through full expensing of investment. The planning law reforms should have an eye to business activities too – if more out-of-town activity is demanded, let it bloom.

The case for allowing existing businesses and property owners more flexibility – on how they operate, opening hours, what premises can be used for etc– is overwhelming as well. With apologies to my Editor, when we are seriously discussing throwing billions at retailers such as John Lewis or Topshop through vouchers, it seems daft to consider it beyond the pale that such retailers open beyond 6pm on a Sunday. Give freedom to businesses to adjust to what customers want: what barriers exist to entrepreneurs developing drive-through cinemas, for example? These are the sorts of supply-side questions that should animate government.

As always with fiscal events, any financial support to industries will be heralded as ‘good news’  and absence of it denounced as throwing sectors to the wolves. But it’s time for Sunak to be bold and honest: his task is not to “normalise” activity by resuscitating the composition of the March 2020 economy, but to “normalise” the market-led economy that makes us rich by meeting our demands.

Ryan Bourne: Sunak should not and cannot try today to restore pre-virus Britain. It’s gone – and we must now adapt.

7 Jul

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

Rishi Sunak earned plaudits for his dealing with the immediate economic fallout from Covid-19. Yet today’s summer statement presents a thornier challenge than playing Emergency Santa, dishing out funds to keep businesses alive. For today requires taking steps to further facilitate the “normalisation” of economic life.

Boris Johnson waded into economics last week, arguing (rather conveniently) that the Coronavirus highlighted the need for his pre-pandemic “leveling-up” agenda. Exactly how Covid-19 proves the need for, say, HS2 is unclear. But underpinning the Prime Minister’s argument was an assumption that, post-lockdowns, we can get back to focusing on pre-virus priorities – in the Government’s case, state-led economic rebalancing.

Similar “back to our future” thinking underpins business representations ahead of this statement. From calls for taxpayer-financed high stcororeet spending vouchers, to VAT cuts for hard-hit sectors, the prevailing discourse appears to be “now the virus is less of a threat, let’s incentivise returning to normal activity,” with “norma”l meaning “what happened in early March 2020.”

Perhaps it’s because I’m in the U.S. and so have been to this reopening BBQ before, but I bear bad news: while the UK can expect a relatively sharp bounce-back in things such as retail activity, “normalisation” will not and should not mean a return to the economy of March 2020.

Before a vaccine, consumers will go where they feel safe, businesses from restaurants to cinemas will be supply constrained by social distancing, and certain behaviors (from the demand shift from restaurants to supermarkets, to the supply shift to working from home) will partially remain. That will bring major reallocation costs: businesses will close and lay off workers, while other sectors grow.

It was understandable that the Chancellor, not knowing which businesses would be viable after lockdown, set up a furlough scheme to avoid companies and jobs perishing. This helped protect important “job-matching capital” and “firm-specific capital” – i.e. people doing jobs they are good at and firms as important bundles of productive relationships. But one risk was always that businesses would interpret support not as mere lockdown relief, but a commitment to ensure their survival through the whole pandemic.

Some aspects of the campaign for arts subsidies, rumblings by MPs for ongoing aerospace supply-chain support, and the Resolution Foundation’s gimmicky “high street vouchers” idea suggest that some now do believe the Government should support sectors, even after full re-openings, precisely because consumers would otherwise continue to reject them, preferring not to fly as much, attend as many in-person events, or go to fewer restaurants or stores.

This is a very different policy proposition. Attempting to keep the March 2020 economy preserved as some eternal truth would mean workers and funds not being where businesses and consumers actually value them given today’s circumstances, bringing large economic costs beyond the fiscal.

For example, if more professionals now work from home semi-permanently, then tastes will shift from buying lunches within cities to local delis, online, or at supermarkets. Hence why Pret is laying off workers.

But as Julian Jessop has said, the purpose of economic policy should not be to protect Pret jobs. What normalisation should instead mean is the return to a functioning market economy where the rise and fall of businesses depends on their ability to meet our wants and needs in today’s circumstances. Sunak’s aim, in other words, should now be “market-led adaptation to the virus.”

We want businesses to figure out how to serve us in safe, cost-effective ways. The alternative – having the government tilt activity towards our early 2020 preferences – would not only encourage activity worse from a public health risk perspective, but also inevitably subsidise much that would take place anyway.

So Sunak should today reject “painting by numbers Keynesianism” that sees industry spending collapses as holes taxpayers should help fill in. He should snub VAT cuts or vouchers. If, with the virus still around, people would rather spend money on food to cook at home, Netflix subscriptions, and a hot tub for the back garden over restaurants, cinemas, and trips to the Lake District, workers and capital should flow accordingly. Economic activity serves consumers, not vice versa.

That’s not to say government cannot make this process less painful. But we need to be clear about the challenge we face: a supply-side shock we hid with relief. New realities mean workers in the wrong jobs, businesses serving customers in the wrong ways, and capital in the wrong places. Government policy should focus on removing barriers that gum up businesses, landlords, workers and entrepreneurs adjusting.

Sunak appears to get this on the worker side. He is tapering the furlough scheme gradually to give businesses breathing room, but inevitably those with newly uneconomic business models will make some permanent layoffs.

It’s crucial to try to get workers reallocated into new roles quickly to avoid the scarring effects of unemployment. Direct financial incentives for new hiring, even beyond subsidies for traineeships trailed in the papers, would encourage this. The reported plans for expansions of jobcentre capabilities are important too to try to speed up the matching process of unemployed workers to new roles, as would re-training efforts be. Some U.S. states are rolling back licensing restrictions on people shifting to different jobs too. With child-care difficult to come by, now would be a good time to review the UK’s oppressive childcare regulations, for example.

Yet the Conservatives should do more to facilitate the adaptation of businesses as well. Repurposing premises to earn consumers’ confidence often requires upfront investments that the Chancellor should write-off entirely for the basis of tax, through full expensing of investment. The planning law reforms should have an eye to business activities too – if more out-of-town activity is demanded, let it bloom.

The case for allowing existing businesses and property owners more flexibility – on how they operate, opening hours, what premises can be used for etc– is overwhelming as well. With apologies to my Editor, when we are seriously discussing throwing billions at retailers such as John Lewis or Topshop through vouchers, it seems daft to consider it beyond the pale that such retailers open beyond 6pm on a Sunday. Give freedom to businesses to adjust to what customers want: what barriers exist to entrepreneurs developing drive-through cinemas, for example? These are the sorts of supply-side questions that should animate government.

As always with fiscal events, any financial support to industries will be heralded as ‘good news’  and absence of it denounced as throwing sectors to the wolves. But it’s time for Sunak to be bold and honest: his task is not to “normalise” activity by resuscitating the composition of the March 2020 economy, but to “normalise” the market-led economy that makes us rich by meeting our demands.

Richard Holden: On Wednesday, Sunak needs to display as much confidence in Britain as local publications are showing in North West Durham

6 Jul

Richard Holden is MP for North West Durham.

The Dairy Barn Cafe, North Bitchburn

As Saturday approached, you could feel the febrile excitement and demand for “the story” across the media. Television news and radio bulletins boiled over with predictions of carnage on Saturday night. The broadcasters and papers were eagerly anticipating Freshers Week-esque scenes of drunken debauchery as the public decided to get wasted in a post-lockdown bacchanal.

In North West Durham, I spent Saturday evening visiting the: Duke of Wellington, Consett Rugby Club, the Wheatsheaf in Leadgate and finally the Black Lion, my local in Wolsingham. I’m afraid that I must report that calm and friendly were the orders of the evenings – as it appears were the scenes across the rest of the country too.

Tog, the landlord of the Duke, four doors down from my office on Medomsley Road, took me to his beer garden to show me a mural he’d commissioned during lockdown from a local artist. Sarah-Jane, at the Black Lion, had me take a peak at how she’d transformed her beer garden from a flagged smoking area to a lively and welcoming garden of tables, tasteful lighting and colourful plants and flowers.

It was superb to see responsible local businesses at the heart of their communities investing in their businesses, and ensuring a safe and socially distanced experience for their customers. This hope of better things to come from local firms, with small but significant investments in themselves, is really welcome at a time when I know so many people are not only worried by the virus, but also about their jobs and their incomes.

However, in many sectors of the economy the broad economic impact of the global Coronavirus pandemic is coming through hard, and is reflecting just how interconnected demand is across our economy.

To give one example: at first as the crisis broke, I had travel agents and their staff get in touch. Then came had pilots and crew from Easyjet and British Airways based at Newcastle airport, as the airlines cut back. More recently, I’ve been in touch with a local manufacturing firm which makes inner parts for the wings of Airbus planes, and which is having to lay off half its staff (some of their factories across the UK have closed completely and will not re-open).

Very quickly, the lack of ability to – and demand for – travel has led to manufacturing job losses well down the chain. It’s clear that some sectors have been far more badly affected than others, and that base consumer demand is having a rapid knock-on effect.

Looking out of the panoramic window of the just re-opened Dairy Barn Café, I can see right up Weardale, and am reminded of a conversation I had early in the last election campaign. “Remember, we’re the working dale, Richard” a man in late middle-age in local authority housing in Stanhope had said to me.

At the time it made me think of where I grew up on the other side of the Pennines – walking up Pendle Hill in Lancashire 20 years ago, and looking south to the mill towns of East Lancashire nestled in the valleys below. Working towns like Burnley, Colne and Accrington which have since switched to electing Conservative MPs.

As the furlough scheme, which protected so many jobs at the height of the lockdown is wound down, we’ve got to do everything we can to help return demand to the economy – the demand that comes from confidence in the future. Demand that means work for decent working people up and down the seats of the ‘Blue Wall’.

This confidence and positive view to the future is not something anyone’s hearing from the Labour leadership under Keir Starmer. The best thing he could muster last week was to suggest that the Government was giving “mixed messages” by saying, “get out and about, have a drink, but do so safely”.  Which shows that he’s struggling to get cut-through – especially when the man in the village pub in County Durham is by and large is doing exactly what the Government has suggested.

Labour’s shambolic response to getting children back to school, by saying one thing nationally and another in Labour-run local authorities, certainly inspires no-one with confidence – except a growing confidence that Sir Keir is a political opportunist. He was, after all, remarkably quiet on anti-semitism under Jeremy Corbyn, in order to keep hold of Momentum votes for the leadership. And he tried to play both sides with Labour’s disastrous “we’ll accept the result, but negotiate a new deal, and then have a second referendum” policy on Brexit.

Perhaps most interestingly, this weekend marked the first time that any constituent has mentioned the Labour leader to me unprompted. She was a former Labour voter who switched to the Conservatives in 2017 (and had managed to convince her husband to do so in 2019), and it was clear that, after being initially open-minded, the new Labour leader was leaving them increasingly cool.

The Government has done well in giving support to business and jobs – Rishi Sunak has certainly won fans across the country for that. But without wanting to pile too much pressure on the Chancellor ahead of his statement on Wednesday, we’re all only as good as our most recent decisions in politics.

As we move out of the initial stages of lockdown, Rishi’s decision must be to put confidence as much confidence and therefore demand back into the economy – especially in hard hit sectors – as he can. Everyone knows that it’s going to a difficult time and no-one expects the Government to get everything a hundred per cent right, but voters do expect us to really try.

And in doing so over the next few weeks and months, the Government has got to show the confidence in Britain that my local publicans in North West Durham are showing. And, as they press ahead with “levelling up” their pubs, we must also keep that long-term goal in mind too for the North.

Confidence is the thing that underlies every relationship with the state that we have – from policing with consent to the value of the fiat currency in our pocket. Confidence that governments have the people in mind and the ability to deliver is what keeps them in office.

The electorate here in County Durham and in the mill Towns of East Lancashire took us into their confidence and bestowed their votes upon us. Despite the difficulties of the pandemic, the Government has supported people. Now our task is to give our businesses the confidence to look to the future positively, which will in turn give the people who work for them the confidence to invest and spend in a virtuous circle, bouncing forward out of the fear of recent months and towards the hope of a brighter future.

Richard Holden: On Wednesday, Sunak needs to display as much confidence in Britain as local publications are showing in North West Durham

6 Jul

Richard Holden is MP for North West Durham.

The Dairy Barn Cafe, North Bitchburn

As Saturday approached, you could feel the febrile excitement and demand for “the story” across the media. Television news and radio bulletins boiled over with predictions of carnage on Saturday night. The broadcasters and papers were eagerly anticipating Freshers Week-esque scenes of drunken debauchery as the public decided to get wasted in a post-lockdown bacchanal.

In North West Durham, I spent Saturday evening visiting the: Duke of Wellington, Consett Rugby Club, the Wheatsheaf in Leadgate and finally the Black Lion, my local in Wolsingham. I’m afraid that I must report that calm and friendly were the orders of the evenings – as it appears were the scenes across the rest of the country too.

Tog, the landlord of the Duke, four doors down from my office on Medomsley Road, took me to his beer garden to show me a mural he’d commissioned during lockdown from a local artist. Sarah-Jane, at the Black Lion, had me take a peak at how she’d transformed her beer garden from a flagged smoking area to a lively and welcoming garden of tables, tasteful lighting and colourful plants and flowers.

It was superb to see responsible local businesses at the heart of their communities investing in their businesses, and ensuring a safe and socially distanced experience for their customers. This hope of better things to come from local firms, with small but significant investments in themselves, is really welcome at a time when I know so many people are not only worried by the virus, but also about their jobs and their incomes.

However, in many sectors of the economy the broad economic impact of the global Coronavirus pandemic is coming through hard, and is reflecting just how interconnected demand is across our economy.

To give one example: at first as the crisis broke, I had travel agents and their staff get in touch. Then came had pilots and crew from Easyjet and British Airways based at Newcastle airport, as the airlines cut back. More recently, I’ve been in touch with a local manufacturing firm which makes inner parts for the wings of Airbus planes, and which is having to lay off half its staff (some of their factories across the UK have closed completely and will not re-open).

Very quickly, the lack of ability to – and demand for – travel has led to manufacturing job losses well down the chain. It’s clear that some sectors have been far more badly affected than others, and that base consumer demand is having a rapid knock-on effect.

Looking out of the panoramic window of the just re-opened Dairy Barn Café, I can see right up Weardale, and am reminded of a conversation I had early in the last election campaign. “Remember, we’re the working dale, Richard” a man in late middle-age in local authority housing in Stanhope had said to me.

At the time it made me think of where I grew up on the other side of the Pennines – walking up Pendle Hill in Lancashire 20 years ago, and looking south to the mill towns of East Lancashire nestled in the valleys below. Working towns like Burnley, Colne and Accrington which have since switched to electing Conservative MPs.

As the furlough scheme, which protected so many jobs at the height of the lockdown is wound down, we’ve got to do everything we can to help return demand to the economy – the demand that comes from confidence in the future. Demand that means work for decent working people up and down the seats of the ‘Blue Wall’.

This confidence and positive view to the future is not something anyone’s hearing from the Labour leadership under Keir Starmer. The best thing he could muster last week was to suggest that the Government was giving “mixed messages” by saying, “get out and about, have a drink, but do so safely”.  Which shows that he’s struggling to get cut-through – especially when the man in the village pub in County Durham is by and large is doing exactly what the Government has suggested.

Labour’s shambolic response to getting children back to school, by saying one thing nationally and another in Labour-run local authorities, certainly inspires no-one with confidence – except a growing confidence that Sir Keir is a political opportunist. He was, after all, remarkably quiet on anti-semitism under Jeremy Corbyn, in order to keep hold of Momentum votes for the leadership. And he tried to play both sides with Labour’s disastrous “we’ll accept the result, but negotiate a new deal, and then have a second referendum” policy on Brexit.

Perhaps most interestingly, this weekend marked the first time that any constituent has mentioned the Labour leader to me unprompted. She was a former Labour voter who switched to the Conservatives in 2017 (and had managed to convince her husband to do so in 2019), and it was clear that, after being initially open-minded, the new Labour leader was leaving them increasingly cool.

The Government has done well in giving support to business and jobs – Rishi Sunak has certainly won fans across the country for that. But without wanting to pile too much pressure on the Chancellor ahead of his statement on Wednesday, we’re all only as good as our most recent decisions in politics.

As we move out of the initial stages of lockdown, Rishi’s decision must be to put confidence as much confidence and therefore demand back into the economy – especially in hard hit sectors – as he can. Everyone knows that it’s going to a difficult time and no-one expects the Government to get everything a hundred per cent right, but voters do expect us to really try.

And in doing so over the next few weeks and months, the Government has got to show the confidence in Britain that my local publicans in North West Durham are showing. And, as they press ahead with “levelling up” their pubs, we must also keep that long-term goal in mind too for the North.

Confidence is the thing that underlies every relationship with the state that we have – from policing with consent to the value of the fiat currency in our pocket. Confidence that governments have the people in mind and the ability to deliver is what keeps them in office.

The electorate here in County Durham and in the mill Towns of East Lancashire took us into their confidence and bestowed their votes upon us. Despite the difficulties of the pandemic, the Government has supported people. Now our task is to give our businesses the confidence to look to the future positively, which will in turn give the people who work for them the confidence to invest and spend in a virtuous circle, bouncing forward out of the fear of recent months and towards the hope of a brighter future.

Charlotte Pickles: Ten million people are at risk of becoming unemployed. They must be Sunak’s priority this week.

5 Jul

Charlotte Pickles is Deputy Director and Head of Research at the Reform think tank.

The Chancellor’s economic statement next week may be his biggest test yet. During the last few days, UK firms have announced 12,000 job losses. John Lewis, Upper Crust, Topshop, Airbus, WH Smith, TM Lewin, Easy Jet, Accenture are just some of the household names cutting jobs. Small businesses will be doing the same; you just won’t hear about them.

This is the start of the wave of redundancies Reform predicted back in April when we called on the Government to extend the furlough scheme and make it more flexible. The Government stepped up then; they need to do so again. The alternative is the worst unemployment crisis since the Great Depression.

Some readers will be sceptical. Great swathes of the economy reopened this weekend. Across the pond, the American economy added almost five million jobs in June, and the rise in the Eurozone’s unemployment rate in May was lower than expected.

At home, Andy Haldane, Chief Economist at the Bank of England, announced that consumer spending had “risen both sooner and materially faster” than predicted, meaning the GDP hit could be half that predicted in May. Very good news indeed.

However, underneath these headline green shoots is a much starker picture. Haldane also says that the labour market outlook is not as encouraging – that unemployment could be worse than the Bank’s May forecast. As in much of Europe, where more than 40 million people remain supported on furlough schemes, we have no idea if furloughed workers will return to work or join the unemployment rolls.

So while it is promising news that the UK economy appears to be bouncing back, it would be dangerously foolish to assume a jobs recovery at the same pace. Indeed, vacancies last week were down 24 per cent on the previous week.

Next month, businesses are required to start contributing to the cost of their furloughed workers. That’s reasonable, over nine million people have had their wages subsidised and the Government cannot continue this £10 billion-a-month support indefinitely – not least as it risks keeping people in ‘zombie jobs’, delaying their move into new roles and damaging the economy further.

But the phasing out of the furlough scheme will trigger more redundancies. Hundreds of thousands of businesses have gone for three months with little to no revenue. The Government’s loans and grants provided a lifeline for many, but social distancing measures and people’s fear of the virus will mean suppressed revenues for some time.

Expenditure will have to be cut if businesses are to stay afloat – half of companies expect to make redundancies in the next few months.

Which is precisely why the Chancellor must use his statement on Wednesday to announce a comprehensive and ambitious plan for averting mass unemployment.

Because while it might be reasonable to see how consumers respond to the further lifting of lockdown before taking a decision on something like a VAT cut – which would be pointlessly costly if the issue isn’t demand – delaying decisions about investment in employment and skills could be catastrophic.

In a new report this week, produced jointly by Reform and the Learning and Work Institute, we estimate that around ten million people are potentially at risk of unemployment. Those at greatest risk are in areas that already had high unemployment, have low qualification levels and are currently in low paid work. In other words, they will be least resilient to losing their jobs. The result of inaction, even delayed action, will be a levelling down.

The Conservative manifesto pledged to undo the decade-long underinvestment in skills; to help workers “train and retrain for the jobs and industries of the future”.

This recession is unique for its sectoral nature, meaning a large number of workers will not only need to find new jobs, but to switch careers. But it is also unique in that the Government has a direct line to those most vulnerable to unemployment – the furlough scheme.

The Prime Minster should deliver on his manifesto promise with a bold offer to anyone on furlough, or in an at-risk sector like retail or hospitality. This should include universal entitlement to funding for a qualification, or modules of a qualification, up to and including level three, as well as online advice and support.

For those needing to change careers, which we estimate will be up to 200,000 people, the Government should provide a £5,000 learning account for accredited training. They should also receive a time-limited, means-tested maintenance grant to help mitigate wage drops as they start over in a new sector. Eligibility could be linked to an individual’s history of National Insurance contributions.

And to incentivise employers both to hire apprentices and career changers, and to pay living wages, the Government should allow firms to use a proportion of their apprenticeship levy to support wages, with an equivalent grant for SMEs.

On Wednesday, the Chancellor must show the same bold thinking that delivered the furlough scheme. Failure to act now could mean mass unemployment with its sky-high social and economic costs. That’s a legacy the Government should do everything to avoid.

Alan Mak: Reform capital allowances and R&D tax credits to fire up investment and create jobs

1 Jul

Alan Mak is MP for Havant and Founder of the APPG on the Fourth Industrial Revolution.

Improving Britain’s productivity is key to both our economic recovery after Coronavirus and enhancing our global competitiveness post-Brexit. The best lever for firing up Britain’s productivity is incentivising more investment in the latest IT and software, new plant and advanced machinery – all proven catalysts of growth and efficiency. Failure to direct billions of pounds into these fundamental building blocks of our economy will hold back our recovery.

The State cannot be expected to do all the heavy lifting, especially given the Government’s substantial spending commitments to help the country through the lockdown and beyond. Instead, it must be businesses that take the lead, especially SMEs who have traditionally made up the “long tail” of unproductive companies.

Rather than a safety-first approach of hoarding cash, postponing investment and hunkering down, businesses must be incentivised to invest more in the coming months. This must be an economic recovery powered by bold investment decisions that create jobs, upgrade technology and boost productivity.

The dampening effect on capital expenditure (capex) and investment caused by Coronavirus is already large and destructive. One investment bank estimates that £23 billion has been slashed from this year’s capex budgets already, whilst the Bank of England predicts a 26 per cent drop in business investment for 2020. In 2009, as the financial crisis erupted, the fall was 16 per cent by comparison. Some of the country’s biggest employers such as BP and HSBC have already started cutting investment.

In practice this means IT systems and software – now at the heart of every business – being used for longer. Machines normally replaced every decade will have their life extended. Trucks and vans will be allowed to age. Outdated buildings that offer no room for new employees will be kept on. Research and development (R&D) could stall.

Reductions in investment not only have negative consequences for our country’s GDP, jobs and productivity, it also damages our capacity for R&D and our reputation as a nation that innovates for the future – key to our leadership of the Fourth Industrial Revolution.

Reforming and adapting two existing incentive schemes – the Annual Investment Allowance and the R&D Tax Credit – would have a major impact in reversing this decline in business investment and productivity.

Introduce a new Annual Investment Allowance ceiling for green or digital investments

Capital allowances enable a business to deduct the cost of qualifying items from their profits, lowering their corporation tax bill. This incentivises investment in key productive goods from machines to laptops.

The Annual Investment Allowance (AIA) is the annual cap on such deductions and its level has varied dramatically in recent years from £25,000 in 2012 to £500,000 in 2015. Until December 2018, the AIA was £200,000 but it was raised to its current £1M level from January 2019. The £1 million level is due to expire this December.

To encourage a green recovery and investments that focus on digitisation, the AIA could be allowed to fall back to the previous £200,000 ceiling, except for certain types of capital expenditure that achieve environmental or digital goals which would still benefit from the £1 million special ceiling. Replacing a diesel-powered machine on the factory floor with one powered by electricity, or digitising a production line by adding new software powered by artificial intelligence (AI), could be examples of investment that would be rewarded by the new special AIA ceiling.

Alongside the introduction of a special £1 million ceiling, the scope of what can be claimed through capital allowances should also be expanded to take account of the growing digital dimensions of every business. For example, digital tools purchased on a subscription basis (such as monthly website hosting costs) should benefit from relief not just one-off investments in physical goods (such as buying a new machine).

Increase R&D tax relief rates for SMEs and widen the scope of the reliefs

R&D tax reliefs support companies that work on innovative projects in science and technology, and enables the cost of qualifying projects to be reclaimed from HMRC. They’re especially effective for digital start-ups, who get a tax break and much needed cashflow back for critical work.

From April this year the relief rate is 13 per cent, but the lion’s share of R&D tax relief is claimed by large, research-intensive businesses. SMEs can currently claim up to 14.5 per cent in certain circumstances, but incremental increases such as this do not have a dramatic effect on investment appetite.

Often the most cutting-edge innovation, especially in the digital sphere, is carried out by small teams and growing start-ups – not just multinationals. To encourage more micro businesses and SMEs to pursue more R&D, new and much higher rates of relief should be introduced. For example, a rate of 25 per cent for SMEs with fewer than 150 employees, and 35 per cent for SMEs with fewer than 50 employees.

What qualifies for relief must also be broadened to include more of the digital tools that software developers use, including software testing tools and data analytics software. In addition, cloud storage fees, user experience development work and the cost of buying data sets needed to train algorithms for AI-driven start-ups should also be tax deductible.

Britain is currently 19th out of the 37 industrialised nations in the OECD when it comes to R&D investment, spending 1.7 per cent of GDP against the OECD average of 2.4 per cent. To match world leaders including Germany and Japan, who invest over three per cent, we must urgently update and expand our R&D tax relief regime.

This is the second in a three-part series on how to boost our economy after Coronavirus.