Due to the coronavirus crisis, many businesses have been ordered to close for much of the past year, while many others have had to implement costly and disruptive practices to mitigate the virus. Unemployment has been kept in check by furloughing ten million jobs, while economic output has fallen substantially.
With vaccinations and treatments rolling out, the government must ensure that Britain emerges out of the pandemic with job-creating, sustainable growth and avoids a spiral of panic and redundancies. The economy is in an unprecedentedly precarious position.
Despite the obvious challenges, many households have substantially improved their finances due to stable incomes and reduced spending, leaving much pent-up demand for when the economy is re-opened. Some businesses report having successfully managed to improve their performance with increased use of technology and remote working, while it may be possible for many others to revert back rapidly once the pandemic comes to a close. But the number of people claiming unemployment benefits has soared and some of the enormous number of furloughed staff may join their ranks, potentially generating a new contraction.
A skilfully managed recovery is vital to maximise investment and job creation and minimise uncertainty and redundancies. Three key policy pillars will be critical in a recovery budget: respite, rescue and revival.
1. Respite from tax rises
Without delay, the chancellor must pledge that there will be no tax increases before April 2023 at the earliest. The sooner this pledge is made, the sooner businesses and households can benefit from the stability and certainty it will provide over the next two years. Crucially, this must include preventing upcoming rises such as the end of the £500,000 stamp duty land tax threshold as well as introducing a new lock on ‘fiscal drag’ – moving tax thresholds up with inflation or earnings – to protect taxpayers from being dragged into higher tax bands by inflation during the pandemic.
2. Rescue for struggling sectors
At the March budget, the chancellor should offer a rescue package to support those businesses which have been hardest hit by the measures taken to address the virus. Businesses which have been required to close should be eligible for an exemption from business rates in 2021-22 and 2022-23. The reduced rate of VAT for hospitality, hotel, holiday accommodation and attractions should be extended until 2022-23. Alcohol duties should be frozen until 2023.
3. Revival for the economy
At the March budget, the chancellor should announce an economic revival package focused on jobs and investment. The twin targets for reform should be the jobs tax and the factory tax. The jobs tax – employer national insurance – should be scrapped and replaced with a temporary payroll levy. The factory tax – corporation tax on investment – should be cut by permanently raising the annual investment allowance from its temporary £1 million limit, due to expire in 2022, to £5 million.