Editor's letter

The “economic emergency” isn't nearly as bad as it could have been

If you listened to Rishi Sunak’s Spending Review, you might be feeling a little down. But don't worry too much. Things might not be anywhere near as bad as Sunak seems to think.

Misery. Misery. If you listened to Chancellor Rishi Sunak’s Spending Review on Wednesday, that is pretty much all you would have heard . The response to Covid-19 has cost a fortune. According to data from George Cooper at Equitile Investments, we have spent in the region of £1m per what statisticians call “quality-adjusted life years”. That’s before we start on the less obvious costs (eg, crime and falling cancer referrals). Our debt-to-GDP ratio is heading for 100% by 2025. We will borrow something in the region of £400bn this year. That’s 19% of GDP, the most ever during peacetime. The UK economy will end this year 11% smaller than it was expected to. By 2025 GDP will still be 3% smaller than it was forecast to be pre-pandemic. Unemployment is going to hit 7.5% (up from 4.8% now). The UK’s “economic emergency has only just begun”, said Sunak. Sounds awful, doesn’t it? 

Good news. It isn’t nearly as bad as it could have been – and it might not be anywhere near as bad as Sunak seems to think. It’s worth remembering that the OBR (Office for Budget Responsibility) has been far too negative on growth every quarter so far this year and that the latest lockdown is not having anything like the impact on activity the first had. Most importantly, this is not a normal recession. It was policy-created. It mostly happened in one six-to-eight week period in the spring and it will not last beyond the end of the year (in his misery it is almost as if the chancellor had forgotten that we are due to start vaccinating our over-80-year-olds in a matter of weeks). 

Most unusually of all, it has left the majority of people in bizarrely good shape – retail spending is now higher than at this time last year. There is unpleasantness ahead in that unemployment number, but nonetheless, as the end of our odd series of rolling lockdowns releases both cash and creativity, the bounce back should be spectacular (maybe buy some cruise ship shares). This economic emergency is not just beginning. It is just beginning to end. That said, you cannot relax. 2021 might be a good time to set about making new money. It might not be such a good time when it comes to hanging on to money you have already made. The detail out on Wednesday told us that getting rid of the deficit will need tax rises or spending cuts of £27bn and £102bn. Two cuts were in the review – to the international aid budget (from 0.7% of GDP to 0.5%) and in the form of a freeze to some public sector pay (an effective cut after inflation). Everyone was outraged – it seems there is no appetite for “austerity” of any kind. So tax rises it is. 

These will be small. No one wants to derail the recovery and raising enough to make a difference would mean raising income tax across the board. No one wants to do that either. But you can expect to see measures targeting wealth, and specifically capital gains (taxing “the rich” is politically OK right now). So do as Sunak suggests, and prepare for that. Britain’s bosses already are: the FT reports that they are moving fast to sell shares now and lock in current low capital gains rates. I’m not sure if that is quite what the chancellor meant when he said we should prepare for tax rises. But if you have substantial gains to crystallise, you may want to consider doing the same.

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