The Economy

Rishi Sunak Expected to Extend Covid Recovery Loan Scheme

In his budget speech next week, the Chancellor is expected to announce an extension of the Government’s Covid recovery loan scheme – the amount of money that has been spent under which has not yet been published – which was due to end on December 31st. The Times has the story.

The scheme was launched in April as a bridge between the more generous coronavirus loan schemes and more normal credit conditions.

It provides credit worth up to £10 million and comes with an 80% Government guarantee for lenders. Its terms are less generous than previous pandemic loan schemes. Lenders are allowed to ask for personal guarantees from directors on loans over £250,000. Fees must be paid from the start and businesses must show that they would be viable were it not for the pandemic and had been affected adversely by the Covid crisis.

Data has not yet been published on how much money has been lent under the scheme. However, banking sources have said that the volume of loans has been lower than expected. Under three earlier Government-backed lending programmes, including the business interruption loan and bounce back loan schemes, almost £80 billion of loans were issued to help companies through the pandemic.

An industry source said: “The take-up [of the recovery loan scheme] was never really expected to be as big as the other schemes, but it also hasn’t been as big as they had expected.” The source said it would “make sense” to continue to provide an alternative to bank lending for businesses into the new year.

The economy grew by 0.4% in August, which was weaker than economists expected. It contracted for the first time in six months in July. …

A Treasury spokesman said: “We have provided over £79 billion to 1.6 million businesses through our government-backed Covid loans, including the recovery loan scheme, to ensure firms had finance they needed throughout the pandemic.”

Worth reading in full.

Leaked Documents Reveal Chancellor’s Concerns about Cost of Moving Towards a Zero-Carbon Economy

Leaked documents obtained by the Observer reveal deep concerns within the Treasury about the economic cost of moving towards a zero-carbon economy. The Chancellor is worried that additional costs from green initiatives would push companies to move production elsewhere.

As Johnson prepares to position the U.K. at the head of global efforts to combat climate change and curb greenhouse gas emissions as host of the Glasgow COP26 meeting, the documents show the Treasury is warning of serious economic damage to the U.K. economy and future tax rises if the U.K. overspends on, or misdirects, green investment.

Green experts said the “half-baked” and “one-sided” Treasury net-zero review presented only the costs of action on emissions, rather than the benefits, such as green jobs, lower energy bills and avoiding the disastrous impact of global heating. They said the review could be “weaponised” by climate-change deniers around the world before COP26, undermining Johnson’s attempts at climate leadership on the global stage.

The internal Treasury documents say that while there may be economic benefits to U.K. companies from swift and appropriate climate action, there is also a danger that economic activity could move abroad if firms found their costs were increasing by more than those of their overseas competitors.

The leaked papers are understood to have been produced to accompany a slide show given confidentially to key groups outside Government in the last month. The documents state: “The investment required to decarbonise the U.K. economy is uncertain but could help to improve the U.K.’s relatively low investment levels and increase productivity.

“However, more green investment is likely to attract diminishing returns, reducing the positive impact of ever more investment on GDP. Some green investments could displace other, more productive, investment opportunities. If more productive investments are made earlier in the transition, this risk may be accentuated later in the transition.”

On the risk of additional costs to companies from green initiatives, the documents say: “Climate action in the U.K. can lead to economic activity moving abroad if it directly leads to costs increasing, and it is more profitable to produce in countries with less stringent climate policies.”

On the fiscal implications, the documents say the cost of moving towards net zero could mean tax rises because of “the erosion of tax revenue from fossil fuel-related activity”. They say: “The Government may need to consider changes to existing taxes and new sources of revenue throughout the transition in order to deliver net zero sustainably, and consistently with the government’s fiscal principles.”

Worth reading in full.

Economy Grew by Less than Expected in August and July Figures Have Been Revised Down

GDP increased by 0.4% in August, below expectations of 0.5% and still lower than pre-lockdown levels. Figures for July have also been revised downwards this morning, showing a 0.1% contraction rather than the previously reported 0.1% growth. MailOnline has the story.

Numbers published this morning by the Office for National Statistics (ONS) revealed that U.K. gross domestic product remains 0.8% lower than it was before the coronavirus crisis.

Meanwhile, the ONS said its figures for July have been revised downwards in a move likely to cause alarm in the Treasury. …

It is the first time the economy has shrunk since January this year when the winter lockdown wreaked havoc.

The ONS said growth picked up in August as the economy benefited from the full lifting of coronavirus restrictions, which boosted hospitality and events sectors.

But the August growth figure was lower than expected, showing signs of a slowdown in the U.K.’s bounce back from the pandemic as global supply chain problems take their toll.

The economy will now need to surge by 2.1% in September if it is to remain on track with the Bank of England’s forecast for overall growth of 2.1% in the third quarter of 2021.

The ONS changed its assessment of the economic picture in July because of downwardly revised data relating to the manufacture of cars, oil and gas. …

Overall consumer-facing services [also] remain 4.7% below the level recorded in February 2020.

Worth reading in full.

Government Borrowed £5 Billion More than Expected in August

Government borrowing last month came in £5 billion higher than was expected and was the second highest figure for August on record, pushing the national debt up to £2.2 trillion. The Times has the story.

Public sector net borrowing was £20.5 billion in August, down £5.5 billion on last year, the Office for National Statistics said, but above the £15.6 billion that economists had expected. …

At 97.6% of GDP, the debt is now at its highest since March 1963.

A sharper fall in borrowing had been expected as the economy opened up, more workers came off furlough and tax receipts recovered. Rising inflation ended those hopes, as debt interest payments increased by £2.9 billion to £6.3 billion, the highest ever for August.

For the first five months of the year, debt servicing costs rose by a total of £10.7 billion to £27.6 billion and the ONS warned that worse was to come. “The recent high levels in debt interest payments are largely a result of movements in the retail prices index to which index-linked gilts are pegged,” it said.

RPI inflation jumped in August to 4.8%, a decade high, but the monthly debt servicing cost was based on the average of RPI between May and June, when it was lower. Economists expect RPI to reach about 5.5% by the end of the year.

Samuel Tombs, U.K. economist at Pantheon Macroeconomics, said debt interest costs are likely to be £13.5 billion higher than the Office for Budget Responsibility, the Government’s fiscal watchdog, predicted in March.

Despite the sharp rise in debt servicing costs, the public finances were stronger for the first five months of the year than the OBR forecast at the March budget. For the financial year-to-date, borrowing was £93.8 billion, £31.8 billion below forecast.

The better-than-expected receipts reflect stronger income tax, VAT and corporation tax revenues and a big reduction in pandemic support schemes. Furlough and self-employed support cost £4.5 billion in August, compared with the same month the previous year, and £34 billion less in the year to date.

The OBR will update its projections on October 27th, when the Chancellor will set out his departmental spending plans and unveil new budget measures. The fiscal watchdog is likely to reduce its £234 billion forecast for borrowing for the year to March 2022.

Worth reading in full.

Hospitality Sector Faces Surge in Bankruptcies as Government Support Dries Up

Months of forced closures during lockdowns followed by staff shortages due to the ‘pingdemic’ means it’s not just shops that are struggling to survive but hospitality businesses too. The number of bankruptcies is already on the up and is expected to peak as Government support runs out. The Telegraph has the story.

The insolvency firm Mazars said the end of pandemic subsidies over the next six months and staff recruitment woes meant those businesses which had just about managed to stay afloat during the pandemic were now starting to feel the pain.

Partner Rebecca Dacre said: “It is clear that we have yet to see the full extent of the pandemic’s financial hit on hotels and restaurants.

“Businesses that are just keeping their head above water are likely to be taken under by the end of Government support schemes, the repeated cost of reopening and restocking, difficulty recruiting staff and lower occupancy or covers due to people’s changing habits or working patterns.

“Those businesses that have benefited from U.K. tourism this summer may still find themselves looking for support after the holiday season ends.”

Hotels and restaurants struggled to repay the loans even as Government support schemes remained in place, allowing them to furlough staff and avoid landlord action for unpaid rents. The Government had also put in place a block on so-called winding up petitions, preventing lenders from asking courts to close businesses which owe them money and sell their assets.

This block is due to be lifted at the end of September, at the same time as the furlough scheme will be completely wound down. Next March, a suspension on landlord action for rent arrears will be lifted. …

The noodle chain Wagamama has become the latest to feel the pinch of labour shortages, warning a fifth of its restaurants are having difficulty hiring chefs.

Chief Executive Thomas Heier said that he was struggling to fill vacancies at 30 sites. He said competition from delivery and logistics companies had drained the pool of available workers. …

It follows a wave of closures during the pandemic, with names such as Byron, the burger chain, and Italian ­eatery Carluccio’s having collapsed. Both were later rescued, although many of their sites were closed.

Worth reading in full.

£2.1 Billion Wasted on Useless PPE – Five Times Higher Than Official Estimate

Over the past year, the Government has wasted more than £2 billion on personal protective equipment (PPE) that could not be used in the NHS. The figure is five times higher than initial official estimates and still under-estimates the true cost. The Sunday Telegraph has the story.

Some 2.1 billion items of PPE have so far been deemed unfit to keep doctors and nurses safe in clinical settings – with 10,000 shipping containers-full still to be unpacked as of May this year, said the Commons Public Accounts Committee (PAC).

The amount of unusable kit is five times higher than the number estimated by the Department of Health and Social Care (DHSC) in January, said the select committee, which monitors public expenditure.

The wasted sum forms part of the estimated £372 billion spent by the U.K. on pandemic-containing measures which will expose taxpayers to “significant financial risks for decades to come”, the cross-party committee warned in two reports published on Sunday.

MPs say they “remain concerned that despite spending over £10 billion on supplies, the PPE stockpile is not fit for purpose” with potential levels of waste “unacceptably high”.

As of May this year, out of 32 billion items of PPE ordered by the DHSC, 11 billion had been distributed, while 12.6 billion pieces are on standby at a cost of around £6.7 million a week in storage, the PAC said.

Some 8.4 billion pieces on order from around the globe have still not arrived in the U.K.

For excess PPE that is suitable for medical use, MPs said they are concerned the Government is “yet to create any robust plans for repurposing and distributing this essential stock in a way which ensures value for money and protects staff and patients”.

A public inquiry scheduled to start next spring into the Government’s handling of the pandemic will not come swiftly enough to ensure lessons are learned, the PAC added.

Ministers also risk undermining public trust by failing to swiftly publish the full details of contracts awarded, the report said.

The PAC noted that details of three-quarters of the 1,644 contracts over £25,000 awarded up to the end of July last year were not made public within the 90-day target.

Worth reading in full.

U.K. Economy Shrunk More Than Previously Thought in First Quarter Thanks to Third Lockdown

The Office for National Statistics (ONS) has revised its GDP figures for the first quarter to show that the economy shrunk more than was previously believed as the third lockdown hit hard. The MailOnline has the story.

Data published by the ONS showed that U.K. gross domestic product (GDP) is estimated to have decreased by 1.6% in the period between January and March. 

That is up slightly on the original estimate of a 1.5% reduction.

It means that the level of GDP now stands at 8.8% below where it was in the fourth quarter of 2019 before the coronavirus pandemic hit, revised from an initial estimate of 8.7%.        

Despite the economic dip in the first three months of 2021, household saving levels again returned to record highs. 

The household saving ratio – the estimate of the amount of money that households can put away – increased to 19.9% in the first quarter. 

That is the second highest ratio ever recorded and compares with 16.1% in the final three months of 2020…

The ONS said that household spending fell in the first quarter of this year as lockdown prevented families from spending money in restaurants and non-essential shops. 

Spending in restaurants and hotels dipped by 37.2% on the previous quarter.     

The ONS said that the dip in GDP was largely driven by contractions in the education, wholesale and retail sectors caused by the tightening of coronavirus curbs. 

The closure of schools and the return of pupils learning at home hit the economy particularly hard. 

Education output shrank by 14.7% in the first quarter of 2021 which “reflects the relatively low level of school attendance in January and February because of the closure of schools as part of the Government response to the coronavirus pandemic”.

Worth reading in full.

“Big Risk” of Inflation Spiralling Out of Control as Government Borrows Another £24 Billion in May

Government borrowing came in lower than estimated in May, but there is little else in the state of the country’s economy to be cheery about. Following more than a year of lockdowns and heavy borrowing, the national debt stands at £2.2 trillion and a former Chancellor has warned there is a big risk of inflation spiralling out of control. The MailOnline has the story.

The Government was in the red by £24.3 billion last month, down from £43.8 billion a year earlier at the height of the pandemic – and crucially below the Office for Budget Responsibility’s forecasts.

However, the figure was still the second highest on record for the month and £18.9 billion more than in May 2019 before the pandemic struck, while national debt now stands at a staggering £2.2 trillion.

The grim fiscal backdrop was highlighted as former Chancellor Ken Clarke warned that there is a “big risk” of inflation running out of control – and urged Mr Sunak to raise more revenue now to make the Government less vulnerable to a resulting spike in interest payments.  

Responding to the figures, Mr Sunak reiterated his pledge to “get the public finances on a sustainable footing”.

“That’s why at the Budget in March I set out the difficult but necessary steps we are taking to keep debt under control in the years to come,” he added.

Concerns over the rebounding economy overheating and causing an inflation spike have been intensifying after the headline rate surged ahead of expectations to hit 2.1% last month.

Graphic from the MailOnline.

In the U.S. it is also at worryingly high levels, as Joe Biden pours money into stimulating the economy. 

Mr Sunak has been wrestling with Boris Johnson over how to fund ambitious “levelling up” spending commitments and a new social care plan.

Downing Street has insisted that the “triple lock” on the state pension will stay in place, even though the warping effects of furlough could mean it rises by 6% this year.  

Number 10 also says the manifesto commitment not to raise income tax, national insurance or VAT in this parliament stands – even though the respected IFS think-tank says that makes it “extremely difficult” for the Chancellor to find ways of raising money.    

Worth reading in full.

Ministers Considering Delaying Freedom Day by a Month to Give Businesses “Certainty”

“The argument is already over” about there being an extension to lockdown, according to one cabinet source. The real question, then, is “for how long will restrictions continue”. Reports suggest that the Government is considering extending lockdown by a month rather than by two weeks so as to give businesses “certainty” that “Freedom Day” won’t be delayed again. Er, come again?

For many businesses – including those which have yet to reopen since the easing of restrictions last month due to the continuation of social distancing guidelines, and those which are taking in little money compared with pre-lockdown levels for the same reason – a four-week extension to lockdown would provide only the certainty that survival will continue to be a great (and potentially impossible) struggle.

The Times has more.

Plans are being discussed for either a two-week or a four-week delay to the final easing of restrictions on June 21st, if the Indian variant of the coronavirus continues to lead to a significant rise in infections and hospital admissions.

The variant now accounts for nine in 10 cases and health leaders called yesterday for delay to prevent hospitals filling up with unvaccinated patients.

Ministers are concerned that a two-week delay would not give businesses the certainty they need because it might have to be extended. They said a four-week delay would ensure that more people in their forties have received two jabs and that the vaccinations have had time to take effect. “This is about giving people certainty,” the source said. “The worst-case scenario is that we ease restrictions and then have to implement them again. This has to be a one-way ticket.”

The Vaccines Minister Nadhim Zahawi today said that the Government must be “really careful” with reopening, telling Times Radio that officials must “continuously learn about how the virus is behaving”.

“We had a very big opening on May 17th where people could meet friends indoors, in a restaurant, in a pub, and socialise indoors as well,” he added. “And I think it’s important that we look at the data very carefully over this weekend and then share it with the nation.”

Some scientific advisers believe a month-long delay that pushes the end of restrictions into the school holidays will allow vaccination to catch up with the faster-spreading strain.

Another cabinet source said that they believed a two-week delay would be sufficient. “By June 21st everyone over 50 who wants a second jab should have had one,” the source said. “You just have to wait another couple of weeks so that they all have full antibody protection. At that point you really have protected the vulnerable.

“Of course there are businesses that want us to stick with June 21st but when Rishi [Sunak, the Chancellor] is letting it be known he’d be happy with a delay you know the argument is already over.”

Worth reading in full.

Productivity Losses Caused by School Closures in the U.S. Will Lead to a 3.6% Decrease in GDP by 2050, According to a New Study

A new U.S. study provides insight into the long-term economic effects of school closures, showing that the costs of lockdowns will be felt long after they’ve ended. Researchers at the University of Pennsylvania’s Wharton School believe that productivity losses caused by school closures during lockdowns will lead to a 3.6% decrease in GDP and a 3.5% decrease in hourly wages by 2050, “relative to the counterfactual where there had been no disruption to learning”. Here are the key findings.

Studies have found that remote education reduces learning outcomes for students and infer that current students are likely to earn less in future wages as a result of lower labour productivity. Labour productivity is an integral component of the production of goods, services, and wealth in an economy. Current cohorts of students with reduced education and lower productivity will be a drag on the future GDP of the United States for decades in the future…

Table 1 shows projected economic effects of school closures relative to a counterfactual where learning was never disrupted by the pandemic. As the cohorts of affected students enter the workforce, average labour productivity decreases relative to the counterfactual. However, less productive workers are a small proportion of the economy’s labour supply and younger workers tend to be less productive, so the aggregate effect is muted initially, with labour productivity decreasing by 0.6% in 2030 relative to the counterfactual scenario. As the affected cohorts age, making up a larger proportion of the workforce and approaching their peak earning years, the relative drop in labour productivity increases to 2.4% in 2040 and 3.3% in 2050.

…Note that current primary schoolers will be aged 34 to 40 in 2050, so the drop in their productivity will continue to affect the economy for many years afterwards.

In an effort to stave off the damage caused by the loss of education, the researchers recommend that the next school year should be extended by one month. They project that this would lower the reduction in GDP from 3.6% to 3.1%.

Extending the 2021-22 school year by one month would cost about $75 billion nationally but would limit the reduction in GDP to 3.1%. This smaller reduction in GDP produces a net present value gain of $1.2 trillion over the next three decades, equal to about a $16 return for each $1 invested in extending the 2021-22 school year.

In Britain, where the impact of school closures is likely to be just as bad for the economy, the Chair of the Education Select Committee says that extending school days is “a serious solution for the Government to consider“. Others, including the Education Policy Institute, have proposed that some pupils should repeat the last school year completely.

The Wharton School study is worth reading in full.