Summer Economic Update July 2020

This was not a Budget, but was still a big deal with £30bn of measures to support the economy. This is particularly significant when seen in combination with £160bn of pandemic-related support already announced, leaving borrowing this year on course to reach £350bn.

Debt interest costs will continue to fall, although the crisis will leave the Treasury with a persistent deficit to address (post-crisis).

The scale of government action reflects the scale of the economic crisis the pandemic has caused. Although the immediate backdrop is of slightly improved, short-term economic forecasts (or would have been, if the Chancellor had let the OBR produce its normal Budget forecasts), big economic challenges will remain until a vaccine arrives.

The Chancellor combined several tried-and-tested recession-fighting policies, with more innovative approaches that attempted to address the specific nature of this very sector-specific crisis.

Kickstart jobs for young people is a tried-and-tested policy, but the new Job Retention Bonus is poorly targeted at the 1 million jobs that are most at risk as the furlough scheme is phased out. It is too small and temporary to have a lasting effect on employment. The lack of further action on jobs leaves the Chancellor risking high unemployment this autumn.

Rightly, the Chancellor focused stimulus measures on (some) of the hardest-hit sectors. The “Eat Out” scheme is far too small to have a major impact, but far more significant (and welcome) is a temporary VAT cut on eating out, accommodation & attractions. This sectoral targeting, though, had a big gap, with no support for the likes of bricks-and-mortar retail.

Having previously taken unprecedented action to protect incomes, the Summer Economic Update provided much more conventional in-scale demand support for the next phase of this crisis. That might be sufficient if the UK has a V-shaped recovery. But, as the virus isn’t going away, HM Treasury should expect to return in the autumn with further measures to support the economy.