Chancellor Rishi Sunak is a lucky man. That might sound odd – after all, he’s come into position just as the worst crisis we’ve seen in over a decade has hit the economy.
But on the other hand, it’s not every day you get to splash £30bn into the economy and have people call you a hero, with nary a worry about how it’s all going to be paid for in the long run.
Like I said – lucky man.
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Anyway, the question is, will his luck hold, or are we just delaying the inevitable here?
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The chancellor’s main measures
Here are the main changes Sunak outlined yesterday.
The most eye-catching one for a lot of readers will be the stamp duty changes. As of now until 31 March, if you are buying a house, then stamp duty doesn’t kick in until the house price is over £500,000 (from £125,000 – in England and Northern Ireland – before the mini-Budget).
So if the house you’re buying is less than £500,000 then you’ll pay no stamp duty at all. If it’s more than £500,000, you only get taxed on the value above that amount. In other words, you’ll be paying £15,000 less than you’d have paid if you completed the day before yesterday. Even landlords and second-home buyers will benefit, although they still have to pay the 3% stamp duty surcharge.
Do note that this only applies in England and Northern Ireland. For readers in Scotland (where stamp duty kicks in over £145,000) and Wales (over £180,000) this doesn’t apply, although the devolved governments will receive funds in lieu of the change, so could do something similar if they want to spend the money that way.
For those who have no intention of moving but could do with some new cavity wall insulation or double glazing, from September, there will be “green grants” of up to £5,000 which will cover two-thirds of the cost of the job. For low income households, the grant is up to £10,000 and covers the entire cost.
On the employment front, the furlough package ends, as planned, in October. But to try to convince employers to keep the faith, there’s a £1,000-per-head bonus for any staff who are kept on until at least the end of January.
There were also moves to encourage companies to take on more apprentices, including paying their wages plus money for overheads on top, for a six-month period.
Meanwhile, for the leisure sector specifically, VAT has been cut from 20% to 5%. And of course, there was the headline-grabbing “Rishi’s dishes” idea – getting up to a tenner off (per head) at all participating restaurants from Mondays to Wednesdays.
Will it work?
This might look like a bit of a grab bag of measures. And you can raise all sorts of objections: are people really going to rush out for lunch or dinner at the start of the week, if they weren’t already? Maybe if they’ve got time off in August, I suppose.
As for the stamp duty holiday – you can argue that it’ll just push up selling prices (though bear in mind that stamp duty is paid in cash, so a big cut like this at least makes it a lot easier to raise a deposit in certain areas). You can also object on the valid basis that the last thing the housing market needs is to have more public money chucked at it.
But there’s a reason for all this. For one, Sunak is limited to the number of levers he can pull immediately, rather than having to wait for a Finance Act to pass Parliament. More pertinently, Sunak isn’t trying to restructure the economy. He’s trying to kickstart it. All of these measures are temporary, so it’s almost pointless to judge them based on their individual merits.
If VAT cuts are passed onto the consumer? Great; the consumer has more money. If the business keeps them? Great; the business has more money. If stamp duty cuts go to the buyer? Great; the buyer has more money. If the seller hikes their house price? Even better; the seller has more money and house prices look as if they’re rising which makes every other homeowner feel richer.
This isn’t 2009. All of this extra money being borrowed and printed isn’t going into the black hole that was the banks’ balance sheets back then. It’s going into the real economy, one way or another.
It’s also worth noting that if these measures don’t work, they won’t actually cost anything like £30bn. If employers don’t take people back from furlough and hang onto them until the end of January, then that measure won’t cost £9.4bn. In a worst-case scenario, it might cost £0. If employers don’t bother taking on apprentices, that’s another £3.7bn unspent.
If we don’t all go out for half-price meals at the start of the week, then that measure won’t cost anything either (although as it’s only budgeted at £500m, it’s clear that this is the “showbiz” bit for the chancellor – and that's already worked, as you can tell from today’s newspaper headlines).
You get the picture. Meanwhile, if these measures do work, the chancellor would argue that they’ll pay for themselves in the long run, which is probably a fair point.
The verdict? Having shut the economy down, the government does have a bit of a responsibility to get it going again. So trying to trigger our “animal spirits” by giving us all deadlines to take advantage of money-off deals on houses and meals out (and employees, for that matter) is as good an idea as any.
And broadly speaking, I’m more optimistic than a lot of people seem to be. So far, a mix of furloughing and forced saving means that most people are not worse off than they were pre-lockdown. Get rid of the restrictions and we could see a healthy bounce back.
And if the bounce back is healthy enough, then the ongoing employment fears will be less of an issue, because the economy will need a lot of those workers to return to their jobs or to new ones.
If that thesis is correct, then Sunak’s little incentive schemes will help at the margins. If it’s not, then meal deal or no, it won’t be enough.
Of course, if it’s not enough, I think you can expect more direct action. If tinkering with helicopter money in the form of meal vouchers and stamp duty cuts doesn’t work, then maybe we’ll get to the “money direct to your bank account” stage.
Either way, I think Dominic’s point yesterday about an inflationary denouement is a good one. And if you don’t already subscribe to MoneyWeek magazine, now’s a good time to do so – you can get your first six issues free here.
