The scale and composition of the stimulus is unfathomable. US household balance sheets are already strong and consumer spending is back at January 2020 levels. What’s holding back activity is not weak incomes, but voluntary and involuntary constraints on socialising. Yet just 1pc of the proposed spending is for vaccines to speed up the reopening, while the bill does little to facilitate the job shifting or encourage new investments to rebuild the economy’s productive capacity.
Democrats’ commitment to ginning up household animal spirits through more and more cash therefore pours fuel over a pile of dry wood that’s about to be lit as freedom returns. As former US treasury secretary Larry Summers has said, if all this does boost spending significantly, it risks setting off significant inflation in an economy that will remain supply constrained as it reopens. That is not helped by the fact that some of the measures, such as the high unemployment benefits, actively disincentivise work and production.
Thankfully, UK Chancellor Rishi Sunak recognises that extending expensive emergency relief is not itself the route to a robust recovery. Reports ahead of next week’s Budget suggest that a range of schemes, from furlough to the stamp duty holiday, will only be extended until Covid‐19 restrictions are fully lifted in June. This shows a healthy appreciation for the balance between current fragility and the need to pivot to recovery.
The Chancellor’s crime is instead his obsession with tax rises. In recent weeks, press reports have suggested he wants to raise the corporation tax rate back up to 25pc, introduce an online sales tax, and equalise capital gains tax rates with income tax. He’s also, apparently, mulling a windfall tax on companies that have enjoyed large pandemic profits. Who this private sector austerity is designed to impress is anyone’s guess. Borrowing is for now cheap and no serious economist believes major tax rises desirable.
Of course, the pandemic may result in a bigger structural deficit, requiring future deficit reduction. All and sundry seem resigned to the idea that the public will “demand” higher spending on health, pandemic preparation and social care after this. But for now the longer‐term impact on our growth potential or politics is unclear, so tax rises seem needlessly destructive. The whole point of allowing debt to act as a shock absorber when the pandemic hit, remember, was to avoid sharp tax hikes destroying incentives to work, produce and invest.
Thankfully, the options before the Chancellor in next week’s Budget are not just dramatic spending splurges or business tax hikes. Instead the Chancellor should return to the war framing and deliver something more boring but sensible: a telegraphed removal of pandemic support, with targeted spending and tax breaks to smooth adjustment to the economy’s reopening.
Thawing activity that has been frozen for nearly a year will create immediate challenges. Office for National Statistics data in January suggested 15–20pc of businesses have no or low confidence they will exist in three months. Redundancies will rise as furlough support is lifted. And it will only take a degree of stickiness in working from home patterns to cause much residential property market disruption and delays in new job matching.
The Chancellor will be under all sorts of pressure from lobby groups to introduce industry‐specific measures, á la Eat Out to Help Out, to prevent this by reviving the economy of February 2020. But the whole point of “normalisation” should be to return to a resilient market economy led by consumers.
A few broad, specific measures could help a lot. As the Institute for Fiscal Studies has said, spending more on job coaches and matching services will be important in preventing prolonged spells of unemployment, as will providing recompense for businesses, such as airlines, that face ongoing restrictions. Companies that are going to be required to engage in rapid testing or other screening for Covid‐19 could be supported in some way too.
But perhaps most important will be making sure businesses enjoy good incentives to move premises, or upgrade machinery. To rebuild supply capacity, in fact, the case is actually far stronger for targeted business tax cuts, such as full and immediate expensing provisions on investment, than rises.