Britain’s leading tax and spending thinktank has criticised the flagship policies in Rishi Sunak’s £30bn summer statement as badly timed, poorly targeted and likely to do little to stop unemployment from rising.
The Institute for Fiscal Studies said most of the £9.4bn allocated for the government’s £1,000 job retention bonus scheme – to incentivise employers to take back furloughed staff – would be spent on jobs that were already safe.
It also said tax increases would be required from 2022 onwards to pay for the government’s Covid-19 response, while warning that the government’s budget deficit – the gap between state expenditure and tax revenue – would reach £350bn this year, the highest level in peacetime for 300 years.
Announced as the focal point of Sunak’s speech on Wednesday, the £1,000 bonus plan is designed to ease the transition from the more generous furlough scheme, which pays 80% of workers’ wages up to £2,500 per month. As many as 9.4m jobs have been furloughed, at a cost to the exchequer so far of £27.4bn, with the government hoping that the companies will take back workers at £1,000 a head rather than lay them off when the job retention programme ends on 31 October.
However, the IFS said much of the bonus plan would be a wasted “deadweight” investment protecting jobs that are already safe. Paul Johnson, director of the IFS, said: “A lot, probably a majority, of the job retention bonus money will go in respect of jobs that would have been, indeed already have been, returned from furlough anyway.”
It thought that several other flagship measure in Sunak’s economic update – including a VAT cut for hospitality firms and an eating out discount scheme – had been launched too soon, given the ongoing risks from Covid-19 and social distancing measures preventing diners from visiting restaurants, pubs and cafes.
The biggest factors keeping people away from restaurants and hospitality businesses such as hotels was not the price of eating out, but the continuing health risks of Covid-19 and physical distancing measures used to restrict capacity at eateries, it said.
Helen Miller, deputy director of the IFS, said: “If restaurants, attractions and hotels are as full as they can be, given the social-distancing constraints, then this policy will effectively be a giveaway, without much fiscal stimulus. And actually quite a poorly targeted giveaway.”
Despite soaring levels of public borrowing to fund the emergency response to Covid-19, the IFS said ministers should avoid cutting spending or raising taxes until a sustainable economic recovery had taken hold.
Paul Johnson, director of the IFS, said: “The time to pay for all this will come. But not this year and not next. Our capacity to do so will depend above all on how the economy recovers.”
“A reckoning in the form of higher taxes will come eventually,” he added.
Warning the government against cutting back its support for the economy too soon, Carl Emmerson, deputy director of the IFS, said the UK government was currently benefiting from record-low interest rates on government debt. The UK’s national debt has increased during the crisis so far to £1.95tn, more than 100% of GDP for the first time since 1963. The IFS said it would take “decades” to get debt levels down to levels before Covid-19.
Should ministers want to stabilise the government’s new, higher levels of debt, he said it would need to consider tax rises to raise around £35bn a year in extra revenue. However, he added: “I certainly don’t think the chancellor should be setting out what he should do now.”