The UK Chancellor of the Exchequer Rishi Sunak presented his Summer Statement this week unveiling an additional £30 billion worth of support to the UK economy. The extra stimulus builds on the ‘New Deal’ reform promised by Prime Minister Boris Johnson.
As an interim step, it paves the way to adjust policy and to accelerate the recovery ahead of Autumn budget later in the year.
The key aspects unveiled were:
- Job Retention Bonus
- Kickstart Scheme
- Temporary VAT reduction for specific industry sectors
- Temporary rise in the Stamp Duty Threshold from £125,000 to £500,000
Job Retention Bonus:
The payments aim to incentivise firms to bring back furloughed workers. The scheme will provide firms with £1,000 for each furloughed worker brought back into employment and held through to at least January 2021. Bringing workers back is an integral component for the economic recovery. At present, there are 9 million workers, one-quarter of the workforce, supported by the Furlough scheme which expires in October.
Retaining workers should help the recovery once they regain their employment; otherwise, skills will be lost, and productivity negatively impacted. The bonus scheme is the most significant component of the package but payments will be deferred until February 2021, i.e. post the January window.
Unfortunately, not everyone will benefit from the payments, with self-employed workers missing out.
One of the unfortunate economic consequences of the virus is the way it disproportionately impacts industries in settings that require strict ongoing social distancing measures. Workers in this category include a large proportion of young people. Therefore, the government will find £2 billion to be paid directly to firms able to offer six-month placements to 16-24-year olds. Kickstart will help mitigate the potential derailment of skills with similar approaches adopted during recessionary times. The difference this time is the recession is expected to be relatively short-lived because demand has been withdrawn due to a Government-imposed lockdown rather than a credit event.
Temporary VAT Cuts:
In the weeks leading up to the statement, expectations for a broad-based reduction in the rate of VAT (20%) diminished. Many believed that a blanket reduction would unduly benefit non-UK businesses. In his statement, the Chancellor announced he would reduce the rate of VAT from 20% to 5% for hospitality, accommodation and attraction sectors from 15th July 2020 to 12th January 2021. The reduction is substantial, but also leaves scope for more changes if needed at the time of the Autumn statement.
Temporary rise in Stamp Duty Threshold:
The threshold will increase from £125,000 (£300,000 for first-time buyers) to £500,000 in England and Northern Ireland with immediate effect to the 31st March 2021. The policy does not cover Scotland and Wales where the devolved administrations agree rates.
Table 1.0 – Residential Stamp Duty Land Tax (SDLT) Rates 08.07.2020 – 31.03.2021:
|Property or lease premium or transfer value||SDLT rate|
|Up to £500,000||Zero|
|The next £425,000 (the portion from £500,001 to £925,000)||5%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%|
|The remaining amount (the portion above £1.5 million)||12%|
Source: GOV.UK, July 2020
For homeowners, property prices have a significant wealth effect presence. Increased wealth supports a propensity to spend and it is probable that the negative (-0.1%) year-on-year house price growth reported by Nationwide for May 2020 will have encouraged the Treasury to take action in this important segment of the economy.
According to the Nationwide survey, the average property value in the UK is £216,403. Based on this number, an estimated 90% of people buying a primary home will pay no stamp duty, and those buying properties above this band will save as much as £15,000.
Estimating the Cost
Eye-watering sums of money are now being deployed to provide support and political ideologies set aside. To date, the overall cost of fiscal measures (spending and lost revenue) to the exchequer is expected to be £350 billion. This equates to 18% of national income. For context, borrowing requirements pre-COVID were expected to be around £65 billion this year.
A full breakdown of the measures can be seen in table 2.0 below, which includes the estimated cost of infrastructure support packages. There were some unexpected announcements such as the ‘Eat Out to Help Out’ policy providing a 50% discount voucher up to a maximum of £10 per head to customers through August to encourage the use of restaurants, bringing a much needed socially distant footfall to the hospitality industry.
Table 2.0 – Fiscal Support Break Down:
|Policy||Total (£ billion)|
|Job Retention Bonus||Approx. 9.0|
|Temporary VAT Cuts||4.1|
|Temporary rise in Stamp Duty Threshold||3.8|
|“Eat Out to Help Out”||0.5|
|Extra Funding for Apprenticeships||1.6|
|Public Sector Decarbonisation||1.1|
|Green Homes Grant||2.0|
Source: Bloomberg, July 2020
Given the scale of support and the funding requirements to match, investor views matter. The UK Gilt market is where buyers and sellers of government debt meet to set prices. Thankfully, the reaction was muted.
During the announcement, markets were little phased, which indicates they were already discounting the requirement for more stimulus to boost growth, i.e. the case in favour of spending is being accepted.
Chart 1.0 – Reaction from the Gilt Market 8th July 2020:
Source: Bloomberg, 8th July 2020
- The proposals are balanced, albeit more support will likely be needed.
- Support thus far is targeted to deliver an efficient allocation of resource.
- Protect incomes, back to work then on with the job of levelling up.
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