U.K. Virus Aid Package Beats Financial Crisis Stimulus

(Bloomberg) --

Chancellor of the Exchequer Rishi Sunak said he’d do “whatever it takes” to prop up businesses and jobs as Britain grapples with the coronavirus pandemic, and he’s putting the country’s money where his mouth is.

Sunak’s fourth emergency package of measures announced Thursday -- 9 billion pounds ($11 billion) of support for the self-employed -- brings the total aid he’s announced since March 11 to 65.5 billion pounds. That eclipses the 42 billion pounds (in today’s money) in tax cuts and additional spending Gordon Brown’s Labour government deployed during the financial crisis a decade ago.

“We are all in this together,” Sunak said. “I am confident we now have the measures in place to ensure we can get through this emergency.”

Sunak has been racing to protect businesses and workers as the pandemic brings normal economic activity to a halt. The stimulus stands at about 3% of gross domestic product, compared with 2% during the financial crisis -- and if the pandemic drags out, there’s the prospect of more to come, as guarantees on wages for the employed and self-employed roll over into future months.

About 3.8 million workers from hairdressers to cleaners will be eligible for the grants to the self-employed. While Sunak initially said the measure would cost tens of billions of pounds, the Treasury later clarified it would cost about 3 billion pounds a month for three months.

“Like all the other programs that have been announced in recent weeks, it will be costly -- the Treasury’s estimate of 3 billion pounds a month looks in the right ballpark -- but it will be money well spent if it succeeds in preventing a recession becoming a depression,” said Dan Hanson, Bloomberg Economics’s senior U.K. economist.

Hanson and Bloomberg Economics colleague Jamie Rush estimate the shutdown of the economy could cost Britain 700,000 jobs. That would take the unemployment rate to 6% -- the highest for six years.

“Some lasting economic damage will be created by the coronavirus pandemic,” Hanson and Rush wrote. “The support has come too late for some while the difficulty in getting money to the right people and companies means some bankruptcies and job losses are inevitable.”

Tax experts also questioned whether the intended recipients will get the money fast enough. Self-employed workers won’t be able to access the cash until the start of June.

“This will leave many of the self-employed, whose business has diminished as a result of Covid-19, with little money to live on over the next two months,” said Tom Evennett, head of personal tax at accounting firm EY.

In another setback for the self-employed, Sunak suggested that once the coronavirus crisis is over, he may re-examine rules that allow them to pay less tax than their salaried counterparts.

“There is an observation that there is currently an inconsistency in contributions by self-employed and employed,” Sunak said. By treating them the same when doling out coronavirus assistance, “it does just throw into light that question of inconsistency and whether that is fair to everyone going forward,” he said.

The coronavirus crisis has transformed the fiscal landscape at a stroke. Britain was on course for a budget deficit of 55 billion pounds in the fiscal year starting April. Now, according to the Institute for Fiscal Studies, borrowing could be as much as 200 billion pounds as an economy on course to shrink at least 5% this year hammers tax revenue and drives up spending on welfare.

That could leave the deficit just below the 10% reached in the aftermath of the financial crisis and push up already elevated debt levels.

The chancellor announced his first economic package to deal with the outbreak when delivering the budget on March 11, unveiling 12 billion pounds of measures to mitigate the effects of the outbreak on the economy.

As evidence mounted that the crisis was snowballing, he followed up with a 350-billion pound stimulus package comprising government-backed loans as well as 20 billion pounds of grants and tax cuts for struggling companies.

Then, last Friday, he announced 7 billion pounds of extra welfare spending and said the government would pay 80% of salaried employees’ wages up to a maximum of 2,500 pounds a month -- a plan Bloomberg Economics estimates will cost 17.5 billion pounds.

Announcing further details of the job-retention program today, the Treasury said the government will also cover employers for the National Insurance and minimum auto-enrolment pension contributions of furloughed workers, saving firms 300 pounds a month per employee on average.

(Updates with further detail of job-retention plan)

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