As pandemic support ends, get ready for the hard yards Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission. There was some good news on the economy a few days ago, which you may have seen. The economy grew by 5.5 per cent in the second quarter, up from an initial 4.8 per cent estimate of the rise in gross domestic product. It meant that the UK’s inferiority complex in relation to other big European countries is over. UK GDP in the second quarter was 3.3 per cent below the pre-pandemic level in the final quarter of 2019, which sems like a very long time ago. This was exactly the same as Germany, fractionally worse than France but better
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As pandemic support ends, get ready for the hard yards
My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.
There was some good news on the economy a few days ago, which you may have seen. The economy grew by 5.5 per cent in the second quarter, up from an initial 4.8 per cent estimate of the rise in gross domestic product. It meant that the UK’s inferiority complex in relation to other big European countries is over.
UK GDP in the second quarter was 3.3 per cent below the pre-pandemic level in the final quarter of 2019, which sems like a very long time ago. This was exactly the same as Germany, fractionally worse than France but better than Italy. America got back to pre-pandemic GDP levels in the first quarter and China did so last year.
The GDP rise in the second quarter was driven by consumer spending, which rose by 7.9 per cent as restrictions were lifted. The saving ratio fell quite sharply, to 11.7 per cent of disposable income, and the statistics point to a slightly smaller wall of savings money waiting to be spent than previously estimated. There was also a big rise in government spending, by an upwardly revised 8.1 per cent.
Businesses have yet to respond to the generous investment incentive unveiled by Rishi Sunak in his March budget, the so-called super deduction against corporation tax. Though on the face of it there was healthy 4.5 per cent rise in business investment in the April-June period, official statisticians point out that much of this was in buildings, which do not qualify for the incentive. Investment in equipment and machinery, which does qualify, was flat.
For those who are captivated by historical comparisons, we may have to drop the “worst in 300 years” label for last year’s plunge in GDP. I quite liked that label, so it is a pity.
The latest revision, a drop of 9.7 per cent last year rather than 9.8, means that the appropriate comparison is with the tumultuous year of 1921, when GDP also fell by 9.7 per cent, rather than the Great Frost of 1709.
In 1921 the Irish war of independence was raging, culminating in the Anglo-Irish treaty at the end of the year, which paved the way for an independent Ireland, initially the Irish Free State, and the creation of Northern Ireland. Among other things to happen in 1921 was the Chequers became the prime minister’s official residence, England suffered a whitewash in the Ashes in Australia and Agatha Christie’s first novel was published in England.
That is looking back a long way. And, while the second quarter news was better, it too is a little historic. We have now reached an interesting, perhaps pivotal moment. Having been given an enormous amount of support during the pandemic, the economy is on its own.
The furlough scheme ended at midnight on Thursday, and Friday saw an increase in VAT on hospitality and one or two related areas from 5 to 12.5 per cent. The cut in stamp duty, extended to September 30 in the March budget, also came to an end on September 30. Most controversially, the £20 a week universal credit uplift will end this Wednesday.
On this, perhaps the most controversial aspect of winding down Covid support, the government is offering targeted support of £500 million to replace a universal credit uplift which costs £6 billion a year. It is not hard to do the maths.
Pandemic support, it should be said, did an excellent job, though it cost a lot. The National Audit Office puts that cost at £370 billion, equivalent to more than 17 per cent of last year’s GDP. Not all the support, of course, came and went in 2020.
The end of the furlough scheme should not result in a big rise in unemployment, which has remained remarkably low in the face of a massive shock. The Bank of England thinks there will be little impact on the jobless rate, currently just 4.6 per cent. There is a decent chance that the rate will stay below 5 per cent, though the economic clouds have darkened.
Given where unemployment might have been – there were fears and forecasts of four million unemployed and a rate of 12 or 14 per cent in the spring of last year – this has been a formidable achievement.
Universal credit provided a lifeline for many people during the pandemic, and still does. Not everybody was in the kind of job in which they could comfortably work from home and build up their stock of savings.
The cut in VAT in hospitality, part of a package of measures which included the now somewhat notorious Eat Out to Help Out, may have been more important in supporting the incomes of beleaguered pubs, restaurants and cafes. As it is, consumer spending on restaurants and hotels rose by more than 60 per cent in the second quarter, having slumped by 30 per cent in the first. For those who like big numbers, it rose by 360 per cent in the third quarter of last year, when we were being encouraged to eat out to help put.
As for stamp duty, the full cut came to an end on June 30, and September 30 marked a return to pre-pandemic rates. This is an element of support which may have worked too well, contributing to an increase in house price inflation which, according to the Nationwide building society, was 10 per cent last month.
We now enter an interlude period between the end of most pandemic support and the start of the tax increases to help pay for it, and for the NHS backlog. In just six months’ time, individuals will face two tax increases, the freezing of income tax allowances and thresholds – a stealth tax increase - and the 1.25 percentage point in the national insurance (NI) rate. Firms will also face a 1.25 percentage point hike in employers’ NI, before the bigger increase in corporation tax, to take effect in April 2023. The chancellor, having handed out a lot of money, will be clawing some back.
There was a time when this interlude was expected to be, if not the lull before the storm, a welcome return to normality. But households are now facing a squeeze from rising energy bills and an increase in inflation which the Bank expects will take it to 4 per cent or more and take longer to recede. Consumer confidence has fallen, even before the tax hikes come through, amid fears of a cost-of-living crisis.
Businesses, meanwhile, are beset with supply and labour shortages, of the kind discussed here last week. It remains to be seen whether, in these circumstances, they will convert investment intentions into actual investment.
Andrew Bailey, the Bank governor, talked in a speech the other day about the “hard yards” of a recovery that is far from complete, and suggested it might take a little longer to get back to pre-pandemic levels of GDP than previously thought.
So we should think of the 5.5 per cent jump in GDP in the second quarter as one of the statistical curiosities thrown up by the peculiarities of the pandemic. Much more modest rises are likely from now on as government support programmes come to an end, and we await tax increases. Harder yards indeed.