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Seeking the silver lining

02 October 2020

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David Lane, Partner and Technical Director

Students in the future studying our own extraordinary times may conclude that the pandemic initiated huge social, economic and environmental change. To borrow from Churchill, we may well be at the "beginning of the end" of an era of stale thinking, environmental degradation, an opportunity to re-think and re-set. Maybe.

Today the UK faces a more immediate and urgent challenge which is the very real threat of rising unemployment.  In response to the former, Chancellor Rishi Sunak announced a series of proposals to replace and/or modify the existing government schemes. We know that at the end of October the existing furlough scheme will finish, replaced by a smaller-scale replacement known as the Job Support Scheme (JSS). The JSS, for six months from November 1st, is designed to protect viable jobs in businesses.

The specific proposals can be found at www.gov.uk/government/publications/winter-economy-plan/winter-economy-plan

As there are no atheists in the trenches, according to the economist Robert Lucas, all governments become "Keynesian in a foxhole" during periods of economic crisis and the Chancellor deserves credit by acting and introducing the furlough scheme and its equivalent for self-employed workers earlier this year, as well as other measures to support businesses. However, the JSS conditions in particular have caused some observers to question whether it will have the same impact, leaving the young and the lower-paid exposed to the threat of prolonged unemployment.

There remain deep reservations over the use of the word "viable". I remember a time when similar expressions were used in connection with coal and steel. These industries at the time were no longer "viable", with huge consequences that are still felt now. The lessons learnt from the 1980s and 90s show that governments need to develop a clear long-term strategy that sets out how, as a nation, we intend to invest to re-train and re-equip those most impacted by this crisis and how we support their communities.

The second longer-term impact of the current crisis is the state of the UK's public finances. According to the Financial Times, we are heading towards a record peace-time deficit in 2020-21 with the central government borrowing £221.2bn in the first five months of this financial year – "11 times greater than the highest ever cash borrowing figure at this point in the financial year since equivalent records began 36 years ago." According to the Office of National Statistics Debt in July (public sector net debt excluding public sector banks) exceeded £2 trillion for the first time. Equivalent to 100.5% of gross domestic product (GDP), an increase of 20.4 percentage points compared with the same point last year and the first time it has been above 100% since the financial year ending (FYE) March 1961.

Concerns about these levels of debt are clearly behind the Chancellor's scaling back of support for those who have essentially been on the Government's payroll since March. This Government and future administrations will be dealing with this new reality for many years to come. Governments will be compelled to create and implement a range of monetary and fiscal packages to revive the economy, to drive up tax revenues and stimulate future growth. We already know that there are significant opportunities for investing in "green infrastructure projects" which can deliver meaningful environmental change and can pay a significant economic dividend.  It feels that austerity is not a route out of this situation. The political and economic risks are too high.

One further possible ramification of the pandemic is the beginning of some significant changes to UK tax, a closing of the gap between the tax treatment between income and "wealth". We may also see future reforms to a range of tax incentives and how these work in the broader economy. On top of this, understanding the impact that leaving the EU will have to not only the UK economy but also the UK itself as a political entity will be very important. There is therefore a lot at stake but also a lot to play for; therefore let us hope that out of this global and national tragedy some meaningful change for the good eventually emerges.

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