A £200bn economic recovery plan is needed from the Chancellor tomorrow to reflect the unprecedented scale and nature of the crisis Britain faces, and the lack of monetary policy firepower available to support the economy, according to a major new report published today (Tuesday) by the Resolution Foundation.
Easing does it makes a comprehensive assessment of the current economic crisis, what the path to recovery might look like, and the policies needed to get Britain there. It calls for a quick, bold and targeted policy response to stave off persistently high unemployment and a larger permanent hit to the economy. Crucially, any policy package needs to be robust to a re-emergence of the virus.
With the reopening phase of the economic crisis now under way, the report says that Britain’s economy could shrink by 9.3 per cent this year – the biggest annual hit in a century.
While this would this be smaller than the hit forecast by the Bank (14 per cent) and OBR (13 per cent), the report warns that the economic recovery next year is likely to be far slower – at just 6 per cent – than the Bank and OBR forecasts (of 15 and 18 per cent respectively).
This bleaker medium-term outlook is based on the fact that face-to-face service sectors of the economy – including hospitality, face-to-face retail, arts, leisure, travel and tourism that together account for one fifth of the UK economy – will remain smaller until a vaccine is found.
The report finds that, until a vaccine is available, the UK’s ‘new normal’ economic capacity could be five per cent lower than its pre-pandemic capacity, suggesting a big and long-lasting economic hit.
Given the scale of the economic hit Britain is facing, the Foundation says the Chancellor should announce a £200 billion fiscal stimulus package – worth 10 per cent GDP – to support the recovery.
The size of the overall macroeconomic stimulus would be in line with that seen during the financial crisis, but with the scale of fiscal support twice as big to reflect the fact that the huge monetary stimulus that led the policy response last time around – including a five percentage point interest rate cut – is not currently available.
Other countries are also planning stimulus measures, and this level of spending would be in line with the scale of response currently being considered in the US, where measures that would amount to up to 15 per cent of GDP have been proposed.
The Foundation recommends that a stimulus package, delivered over two years, should be tightly focused on the specific nature of this exceptional crisis and include:
- A £17bn a year job support package – including: extending the Job Retention Scheme for hard-hit sectors; a new Job Protection Scheme to subsidise the wages of workers returning to work in those sectors; and, job guarantees for young people.
- A £30bn ‘High Street Voucher’ scheme – worth £500 per adult and £250 per child – to be spent in hard-hit sectors of the economy, such as face-to-face retail, hospitality and leisure.
- An Income-Contingent Loan System – capping repayments on crisis loans at five per cent of turnover so that firms can invest and grow coming out of this crisis.
- Trebling down on the ‘levelling up’ agenda by increasing capital investment by £14bn (rather than £5bn) in the current fiscal year.
- Supporting low-income families with a £10 billion boost to Universal Credit.
The Foundation’s analysis shows that this stimulus package would mean the UK’s debt to GDP ratio hitting 106 per cent. However, the cost of servicing this debt would still fall over the coming years.
It adds that a counter-factual ‘no stimulus’ scenario could lead to a further eight per cent hit to the economy, and a further one million jobs being put at risk – showing that a £200bn stimulus is both affordable and vital for Britain’s future economic prospects.
James Smith, Research Director at the Resolution Foundation, said:
“The covid-induced economic crisis is like no other crisis we’ve seen. And with interest rates already at record lows, the Chancellor will need to take the lead in delivering an ambitious policy response to secure Britain’s economic recovery.
“The measures the Chancellor announces in his mini-Budget tomorrow need to be big enough to reflect the size of the crisis we face, targeted at the sectors that need the most support, and flexible enough to cope with the uncertainties that lie ahead.
“A £200bn fiscal stimulus should therefore focus on protecting jobs and supporting spending in hard-hit sectors of the economy, and reflect the fact that low-income households have found it far hardest to cope.
“Having passed his daunting first test of protecting firms and households from the sharpest ever economic shock, the Chancellor now faces the far tougher challenge of securing the recovery. The jobs and living standards of millions depend on getting this recovery plan right.”