The U.K. government’s fiscal and monetary policy response to the coronavirus outbreak will support incomes and should help to limit any long-term economic scarring, according to the Office for Budget Responsibility (OBR).
The current lockdown will deliver a large but “hopefully temporary” shock to the economy and public finances, the independent public finance watchdog said in an April 14 report. This initial assessment was “a scenario rather than a forecast, based on the illustrative assumption that people’s movements (and thus economic activity) would be heavily restricted for three months and would get back to normal over the subsequent three months,” it added.
“Real GDP falls 35 percent in the second quarter, but bounces back quickly. Unemployment rises by more than two million to 10 percent in the second quarter, but then declines more slowly than GDP recovers. Policy measures support households and companies’ finances through the shock,” the OBR said, adding that it had not tried to predict the length of the public health restrictions but assumed a three-month economic lockdown for the purpose of illustration.
“Public sector net borrowing increases by £218 billion in 2020-2021 relative to our March budget forecast (to reach £273 billion or 14 percent of GDP), before falling back close to forecast in the medium term. That would be the largest single-year deficit since the Second World War,” the OBR noted.
The sharp rise in borrowing reflects “the impact of economic disruption on receipts (with smaller effects from policy measures like the business rates holidays) and policy measures that add to public spending (with smaller effects from higher unemployment),” according to the report. “Public sector net debt rises sharply in 2020-2021 thanks to lower GDP, higher borrowing, and the accounting consequences of the Bank of England’s policy measures,” the OBR said.
“If the [public health restrictions] were not stringent enough to control the disease, then the economic impact from illness would be that much greater,” the watchdog added.
“It is clear that [the coronavirus] will have a very significant impact on our economy, in common with economies around the world. . . . People should know that there’s hardship ahead, we won’t be able to protect every job, or every business," Chancellor of the Exchequer Rishi Sunak told BBC News. "The report makes clear that the unprecedented action we’ve taken will help to mitigate the impact of the virus on our economy, and that if we hadn’t done these things, it would mean things were a lot worse — for example, the impact on unemployment.”
Defeating the virus does not involve a choice between health and economics, Sunak added. “That defies common sense. What we need is just to follow the [social distancing] rules and I’m grateful to everyone for doing that over the Easter weekend,” he said.
Fiscal Support Measures
The coronavirus job retention scheme (CJRS) and the self-employment income support scheme (SEISS) are probably the most significant fiscal interventions, potentially “underwriting a significant fraction of private sector employment earnings and thus supporting household incomes,” the OBR said. “Business rates holidays should also help many firms to cover other fixed costs. Other fiscal measures — such as the business interruption loan schemes — also help to limit business failures and job destruction.”
The OBR’s assessment included “broad-brush estimates” of the cost of various policy interventions. It noted that the cost of the CJRS will depend on the number of employees whose jobs are furloughed and for how long — elements that are subject to “enormous uncertainties” — as well as the level of the wage subsidy. It estimated that around 30 percent of employees could be covered, at a cost of £42 billion.
The cost of the SEISS grants is dependent on the same factors as the CJRS, and with the same underlying uncertainties, plus “an additional concern the government has raised around the potential for fraudulent claims,” the OBR noted. It added, “We have yet to estimate the cost of this measure, but external analysis suggests a three-month cost of around £10 billion.”
The cost of business rates support and related grants to small businesses is estimated at £28 billion, while HM Treasury has estimated the cost of welfare measures at £7 billion.
Further Guidance on Self-Employment Income Support
HM Revenue & Customs published a guidance note on April 14 setting out how it will assess eligibility for the SEISS grants, based on the taxpayer’s total income and trading profits. HMRC noted that the scheme is open to those who are “self-employed or a member of a partnership in the U.K. and have lost profits due to coronavirus,” but it did not expand on the “lost profits” condition.
Mel Stride, chair of the House of Commons Treasury Committee, asked HMRC Chief Executive Jim Harra during an April 8 evidence session how HMRC would assess whether that condition is met.
HMRC has no plans to check “in advance of people claiming,” Harra said. “We are relying on people using the scheme responsibly. In practice, we expect the vast majority of self-employed people’s incomes have been affected by the coronavirus outbreak. But I do know that some self-employed people are considering that they won’t apply for the scheme because they don’t need it, or because the nature of their business is such that they don’t believe it has been affected,” he added.
Harra suggested HMRC has a basic protection because a grant will form part of a business’s taxable income. “There’s a sort of natural protection, if a business really is still very profitable, but nevertheless claims [a grant], it will boost their taxable profits. So it really is [about] relying on people doing the right thing. The chancellor has been clear [that] this is a very generous scheme, but it is intended for people who need it because of coronavirus,” he added.
“Frankly, given the impact of this [situation] on self-employed people, on a risk basis I don’t think it’s something that would be very fruitful for me to look into,” Harra said.
“You will need to confirm to HMRC that your business has been adversely affected by coronavirus. HMRC will use a ‘risk-based approach’ to check a person’s compliance with the scheme rules,” the Chartered Institute of Taxation said in an April 14 update.
New research by the Association of Independent Professionals and the Self-Employed (IPSE) has found that almost half of the self-employed fear they will not have enough money to cover basic costs during the coronavirus crisis despite the government support on offer. “Overall, two thirds also say they are worried they will burn through all their savings in the next three months,” IPSE said in an April 14 release.
IPSE recommended including dividends as income for the purpose of the CJRS to help company directors, and extending the SEISS to include the newly self-employed, based on a 2019-2020 tax return to be filed by the end of April.
“The lack of support for limited company directors in SEISS is not just a crack — it is a gaping hole in the package. The government must act quickly to fill it,” said Andy Chamberlain, IPSE’s director of policy.