COVID-19: THE SUNAK "WINTER ECONOMY PLAN"

Rishi Sunak and his Winter Economy Plan

When I was interviewed by David Prever live on BBC Radio Oxford yesterday, Wednesday, we went well beyond his original question.  "How do these changes announced yesterday [by PM Johnson] affect you and your family?"

We talked about the six months of restrictions in prospect.  Having identified that being "in limbo" for this length of time is a problem, he 'appointed' me PM, and asked what I would do.  "One-month lockdown" was my reply.  He then 'appointed' me Chancellor "How are you going to pay for it?" My response was "Put it the other way, how are you going to pay for six months' support?"

Six months.  Six.  Months.  And that won't be the end of it.  Nor are the support measures the only costs.

This afternoon Rishi Sunak, the Chancellor, announced the support he has chosen to provide for those six months, the "Winter Economy Plan", including:

• The "Job Support Scheme" replacing Furlough with a Government subsidy significantly lower than before
• An extention to the "Self-Employed income Support Scheme" (SEISS), but at 20% of average taxable earnings instead of the original 80%.  Reducing cost to the Treasury, but virtually useless to those receiving it, and with a significant number of people again not being eligible
• Deferral of VAT payments by businesses, and income tax deferral for people subject to Self-Assessment
• Extention of loan scheme repayments

Yet Rishi is still expecting significant job losses, which will:

• Become a burden on Universal Credit
• In addition to a loss of PAYE and National Insurance receipts.

IMPACT ON THE EXCHEQUER

That means there are four types of 'cost' to the Exchequer which will hit the deficit and cash flow:

• The costs of this support, which is clearly being withdrawn compared to earlier support
• Reduction in tax receipts
• Increase in unemployment support costs
• The extra costs of running the NHS and 'Test and Trace' with a high infection level

Let's look at those in some greater detail.


TAXATION AND OTHER INCOME

Imagine being the Chancellor.  Tax revenues are like this, according to the 2020 budget:

• 24% / £208 billion from Income Tax
• 17% / £150 billion from National Insurance Contributions
• 18% / £161 billion from VAT
• 7% /£58 for Corporation Tax
• £296 billion all other taxes and receipts
• £873 billion in total

EXPENDITURE

For expenditure, again there are some dominant categories:

• £285 billion for Social Protection
• £178 billion for Health
• £116 billion for Education
• £55 bilion for Defence
• £56 for Debt Interest, which increases with any additional borrowing

So when Sunak talked about spending £12 billion on Test and Trace as part of the COVID-19 defence plan, that's nearly a quarter of the entire traditional Defence budget added to costs.



THE EFFECT OF HIS PROPOSALS ON THE ECONOMY

In summary, a reduction in employment, self-employment and business levels would result in these key revenue losses and cost increases in the general economy:

As we have seen these categories of income and expenditure are the largest, the impact on the Government's cash flow, deficit and borrowing needs will be highly significant.  That Magic Money Tree had better be good!

Add in the costs of the support and the extra costs of running the health service, and no wonder the Conservative ranks are balking at the cost. But whereas they are inclined to be more libertarian, by loosening the restrictions, the better answer (or at least least worst) is a short, sharp lockdown to get to #NearZero.


SO WHAT'S THE ALTERNATIVE?

Getting to #NearZero would have required around 3-4 weeks lockdown in the summer. But the higher the infection level rises, the larger the reduction in infections needed, and the longer it will take.

In financial terms that's a one-month or so cost of support to get to a position that will allow the economy to flourish.  In contrast, the Government's plan to run a higher level of infection will not only kill more people but it will kill jobs and cost a fortune, over a longer period:

We've also seen that #NearZero produces a better outcome for lives, livelihoods and life. So with the higher financial cost of its strategy, the Government's choice looks nowhere as good as #NearZero.


I'm not saying getting to #NearZero would be easy.  There are some critical pre-conditions to a lockdown, especially to avoid a subsequent resurgence.  But what would you rather happen:

• Spend a fortune hobbling along in limbo with a high death count? or
• Investing in a short sharp lockdown so we can get back to near-normal, with a thriving economy and a much lower cost in deaths?