AAT opinion: how can Government plot a course out of the recession?

The level and nature of the measures that the Government has put in place reflect the extraordinary nature of the challenge we are facing.

In May, the Office for Budget Responsibility identified that the direct effect of the Government’s measures in response to the coronavirus (Covid-19) pandemic would amount to £123.2bn.

The forecasts suggest that the result of this will be a £300bn budget deficit in the current financial year. 

The Resolution Foundation, an independent think-tank, recently produced figures calculating the economic impact of Covid-19, suggesting that a six-month period of social distancing would require borrowing of 22% of GDP this year, a level of borrowing not seen since World War II. It went on to suggest that unemployment would rise to almost five million (approximately 14%) across the same six-month period.  

So how does the Chancellor plot a course out of the recession?

Inevitably, there has been significant focus on the potential changes in the tax landscape. Indeed, back in March, when announcing measures to assist the self-employed, the Chancellor hinted at increasing NICs for this group, to bring the rates in line with employees. He said: “If we all want to benefit from state support, we must all pay equally in future.” 

The Government has yet to reveal details on this or other potential measures at this stage. However, a Treasury document revealed by The Telegraph indicated a possible wide-ranging approach that included breaking the Conservative Party’s “triple tax lock” pre-election promise not to increase income tax, National Insurance or VAT. 

If ever there was a time where the Government might look to introduce traditionally politically unpopular proposals, it is now.

AAT identified a number of alternative measures to tax rises in our document, Time for change: Alternatives to tax rises, which we issued in late 2018. Included were measures such as the simplification of Inheritance Tax (putting restrictions around business and agricultural property reliefs), dispensing with the Winter Fuel Allowance and closing the gender pay gap. However, tax policy changes alone are likely to be insufficient in addressing the economic challenge. 

I recently engaged with a CBI webinar that reflected on how Covid-19 is impacting the UK economy and businesses. One of the panelists was the chief economist at the Bank of England, Andy Haldane, who pointed to the likelihood of a contraction of our economy by around 20% by the end of the second quarter of this year. 

He identified that currently between a quarter and a third of the UK workforce was inactive, either as a result of having been furloughed or having been made redundant. He also suggested that the levels of employment are unlikely to return to pre-Covid-19 levels until 2022/23. 

He went on to observe that current levels of household and business spending are very low, and it is likely that even after we emerge from lockdown we can expect to see a period of prolonged caution. Yet it is spending that will be critical in helping the economy emerge from the recession. With the Bank of England looking to provide suitable monetary financial conditions, creating jobs, stimulating spending and engendering confidence among workers and businesses is going to be critical. 

Therefore reinvesting in digital infrastructure, based on upgrading the digital states of businesses (many of whom have shifted to remote working in the past few months), and investing in the development of digital skills with the aim to create rich growth in productivity and employment, will have a crucial part to play in 
any recovery

Further reading

Adam Harper is AAT's Director of Strategy and Professional Standards.

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