Cliff edges rounded but hard landing beckons

Fears of a ‘cliff edge’ end to the furlough scheme were always overdone.  Rishi “whatever it takes” Sunak was always going to do more. Treasury watchers have noted that the Chancellor, who has only been in post for seven months, has a proven track record of letting his actions speak louder than his words. He is an active interventionist Chancellor who has demonstrated an ability to adapt and provide more support as and when required. Another round of support measures / fiscal stimulus was due this autumn. With the pandemic rearing its head again, the associated deterioration in the economic outlook brought measures forward by a number of weeks. Today’s Winter Economy Plan is further evidence of a Chancellor who under-promises and overdelivers. Sunak unveiled a package of measures including a wage support scheme, an extension to the VAT cut for hospitality and tourism, and measures in relation to government loan schemes.

V-word. The flagship announcement and latest acronym to roll out of Whitehall concerned the JSS or Job Support Scheme.  While nowhere near as generous as the soon to expire Job Retention  Scheme, it is still significant. The notable difference with the JSS is its focus and emphasis on viable jobs. ‘V-shaped’ recovery has been the ‘V-word’ many people have been fixated on in recent months but ‘viable’ and ‘viability’ are the ‘v-words’ that are set to dominate the winter months and beyond until a vaccine is found. Sunak reminded people that he cannot save every business or every job. The Chancellor used a rather innocuous phrase “ Our economy is now likely to undergo a more permanent adjustment”. This means that he no longer plans to support jobs that aren’t viable and accepts that a significant number of redundancies will now come.

Wage subsidy. From November to April, the Job Support Scheme, will subsidise workers who have not returned to full-time employment. To be eligible, employees must work a minimum of one-third of their hours. This effectively acts as a viability threshold for support. If you aren’t working a third of normal hours you receive nothing. Employers pay the wages for these 33% of hours. The remaining hours not worked get split into three with the government and employer paying one third each and the last third remaining unpaid. So, an employee working just 33% of their normal hours will receive 77% of their full-time wage. The employer pays 55% of the full-time wage with government picking up the tab for 22%. Note that this 22% wage subsidy compares with 60% when the furlough (JRS) scheme ends on 31 October. All small and medium sized businesses are eligible for the scheme while larger firms will have to show that their turnover has fallen through the crisis.

‘L-shaped’ or pear-shaped? The latest proposals will be clearly welcomed by many sectors and businesses but not others. For employees in the hospitality sector, arts, entertainment, and events industry or instance many will not have one-third of normal hours available to them. Many firms in these sectors are experiencing an ‘L-shaped’ recovery, that is demand has flatlined. Looking ahead, adhering to health regulations, social distancing etc, these firms are not going to be viable for the foreseeable future. Meanwhile those businesses that have reopened are going to have to downsize significantly to the new reality. That means significant redundancies in these sectors that aren’t viable in a ‘living with Covid-19’ world. Clearly areas such as the arts that cannot open or function due to government guidelines will now be turning to the NI Executive seeking further support to assist them through the months ahead.

Help for selfies. A similar level of support will be provided for the self-employed who had previously had the Self Employment Income Support Scheme (SEISS). But it too will see the generosity of support cut to 20% of trading profits, which compares with 80% and 70% respectively for the first and second self-employment grants. Again as with employees, this scheme will not be sufficient for many self-employed workers.  

Extend and pretend? A package of measures were announced to address cashflow pressures for businesses. These were dubbed Pay As You Grow. Bounce Back Loans can now be extended from six to ten years which will nearly halve the monthly debt repayments. Interest-only payment options will also be available for firms struggling. Those in most difficulty can suspend payments for six months.  Significantly, any firms availing of Pay As You Grow will not have their credit rating adversely affected. Clearly these new measures are welcomed, but for many firms the scale of the debt burden will restrict their recovery regardless of whether repayment terms are frozen, extended or switched to an interest-only basis. This issue is likely to feature next year and beyond. To this end, it is interesting to note that a new, successor loan programme is set to begin in January 2021.  Watch this space. 

Spread & extend. Businesses have already benefited from a VAT payment deferral. The next payment was to be due next March. Businesses now have the option to spread payments over 11 months with no interest to pay. Meanwhile self-assessed income tax payers have an additional 12 months to pay their upcoming tax bills due at the end of January 2021. Finally, the beleaguered hospitality and tourism sectors will get an extension on their temporary VAT reduction (from 20% to 5%) from 13th January to 31 March.

Hard landing. Whilst the Chancellor has avoided multiple cliff edges (linked to business loans, furlough & VAT payments) with his latest intervention, he has smoothed rather than totally removed the fall, and there is still an inevitable hard landing for the labour market and the economy ahead. For that reason today won’t likely be the last time the Chancellor has to stand at the despatch box and announce a series of radical measures to deal with the economic impact of COVID-19. The Chancellor’s “whatever it takes” mantra will continue to be thoroughly tested.

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