The Treasury is mulling over plans to boost the UK economy by encouraging public spending that will be announced in this week’s summer statement.
On Monday, it was revealed Chancellor Rishi Sunak might issue vouchers worth £500 to all adults and £250 to children that would be spent in the sectors most battered by the crisis.
A temporary lift of the stamp duty threshold to £500,000 from the usual £125,000 in a bid to help homebuyers, might also be on the cards.
Addressing the ‘jobs, jobs, jobs’ strategy announced by Prime Minister Boris Johnson last week, Sunak will reveal a £1,000 cash injection for companies hiring an apprentice, alongside a multibillion-pound package to promote roles linked to sustainability.
The news comes a day after Johnson vowed to allocate £1.57bn to the struggling arts sector, which is enduring months of forced breaks and risking several permanent closures.
The potential VAT cut is also seen as a way to avoid mass unemployment while promoting higher spending.
Not all roses with VAT cut
Deutsche Bank previously said the UK would likely enter deflation territory in late summer through to the turn of the year, but the eventual reversal in the VAT rate is likely to result in prices jumping by more than the drop.
Experts say a ‘blanket’ solution would not benefit the poorer segment of the population, but just encourage big purchases – such as house appliances or cars – to those who have weathered the crisis.
“A VAT cut… would do less for lower-income households, whose finances are most likely to constrain their consumption, because they tend to spend more of their income on VAT exempt, reduced, or zero-rated goods. It also risks being completely wasteful if its timing coincides with a second lockdown,” said the Resolution Foundation thinktank, which proposed the £500 voucher.
By proposing cash injections, the UK would resort to so-called ‘helicopter money’, an expression coined by economist Milton Friedman in 1969 to describe an unusual monetary policy to spread capital.
Germany announced a similar strategy last month with a stimulus package worth €130bn in total.
It set out dozens of measures, including a tax rate cut from 19% to 16%, financial aid allocated to municipalities, families receiving €300 per child and extra help to various struggling sectors.
“The promised rise in “future investment” is per se a good thing to boost the economy (given a large multiplier effect of public investment). Still, timely implementation could be an issue (implementation lags, pent-up investment),” Deutsche Bank said.
“These additional investments will help to raise Germany’s growth potential but are unlikely to have any meaningful effects on economic growth in the short-run.”
Back to the UK, analysts have been looking at a potential £300bn hole in the country's accounts once the crisis is over.
“The Chancellor will have to weigh-up his desire to kick-start the economy after its three-month slumber with the need to raise extra revenue via the tax system,” said Tom Selby from AJ Bell. “A strong recovery should boost tax receipts and lower the amount spent on benefits, automatically improving the Government’s balance sheet.”
It’s all about timing
And if proposals such as the stamp duty ‘holiday’ come too late, they may end up hindering the progress they want to promote.
If it is implemented in autumn, some buyers may end up delaying their summertime purchases to save the extra cash, although many housebuilders – Barratt Developments PLC (LON:BDEV), Berkeley Group Holdings PLC (LON:BKG), Crest Nicholson Holdings PLC (LON:CRST) were already on the rise on Monday.
According to Anna Stupnytska, head of global macro at Fidelity International, we are likely to see monetary and fiscal programmes being extended for a while as the crisis continues to hit.
“Governments have to move from crisis-fighting policies towards growth policies which will be crucial in shaping the recovery,” she noted.
“Any delays in legislating and implementing those might be costly, especially against the background of global social unrest.”