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Macro and Market commentaries

Government introduces measures to backstop the labour force

  • 22 March 2020

David Page, Head of Macro Research at AXA Investment Managers, comments on the UK's government fiscal support during the Covid-19 crisis:

  • Prime Minister announces forced closure of bars, restaurants and other leisure sector facilities in attempt to stop virus spread.
  • Chancellor Sunak announces fresh package of measures aimed at protecting jobs and incomes, including a Jobs Retention Scheme.
  • Our estimates put the total of today’s measures at around £50bn (2.25% of GDP)
  • Chancellor points to all fiscal stimulus measures be debt-financed. Revised financing requirement likely at least £80bn higher.

Prime Minister Johnson and Chancellor Sunak today outlined further measures to provide fiscal support to the UK economy, even as it announced the forced closure of leisure sector facilities. The Prime Minster today stated that he was “telling” UK pubs, bars, restaurants and cafes to close as soon as they reasonably could today and to remain shut, save for take-out services. He also announced the closure of nightclubs, cinemas, gyms and leisure centres, summarising that businesses whose purpose was to bring people together would have to close as the virus made it necessary for people to stay apart. He said the government was attempting to achieve a greater than 75% reduction in social gathering necessary to materially impact the spread of the virus.

The Chancellor then announced a series of measures specifically aimed at supporting jobs and incomes across the economy. The measures included:

  • A Coronavirus Jobs Retention Scheme. This facility would allow employers to recover 80% of the salaries (up to an income of £2500/month)  for workers that were furloughed, rather than made redundant over the coming months. The Scheme is set up to be back-dated from 1 March and initially intended to run for three months, but could be extended as necessary. The Chancellor stated that there would be no financial limit placed on this scheme.
  • Increased the interest free period of Covid Business Interruption Scheme to 12-month.
  • Deferred VAT payments for the quarter.
  • Increased the standard level of Universal Credit by £1k for the year, the Working Tax Credit by £1k and suspended the minimum floor for self-employed to allow access to Universal Credit equivalent.
  • Adding a £1bn increase to Housing Benefit and Universal Credit allowance to 30% of rents in the area.   

It is perhaps indicative that this fiscal support has moved to a new phase of providing support to individuals – moving beyond grand stimulus packages – that the Chancellor did not suggest what today’s measures might cost, despite being specifically asked. The Chancellor suggested that the income benefit measures totalled £7bn while the rent measures would total £1bn. He stated that the VAT deferral would total £30bn. However, he did not give a figure for the Jobs Retention Scheme. The ultimate cost of this Scheme will obviously depend on the number of firms that apply. However, unemployment rose to 8% in the wake of the financial crisis - double the current level of 3.9%. A similar move now could see an additional 1.4m out of work. If all of these workers were instead furloughed, the Scheme would cost around £8bn per quarter. All together the measures announced today look set to total around £50bn (2.25% of GDP) and could conceivably cost more. The Chancellor said that he had been coordinating measures with the UK Debt Management Office (DMO) and that a revised funding remit would be published in April. Based on measures since the Budget (£12bn unfunded at the Budget, £20bn announced earlier this week and an estimated £50bn in today’s measures), the financing remit should rise by at least £80bn at that time.

The Chancellor’s announcements came after the gilt market had closed for the week and we will have to wait until next week to judge market reaction. However, sterling fell by 0.7% to the euro and 1% to the US dollar on the announcement.


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