Connect Four: Choices for fiscal stimulus and what it means for investors

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With the economy facing its worst crisis in generations and unemployment figures increasing at an alarming rate, the government is preparing a number of measures to help the economy recover. The Chancellor Rishi Sunak will deliver a ‘fiscal event’ in July, which will set out the immediate steps the government is taking to boost the economy. It is expected that a full Budget will follow in the autumn once the government has a better idea of which parts of the economy are in need of further support.

With rumours the government is considering a temporary decrease in VAT, we take a look at four potential measures the government could implement to kick-start the economy and what they would mean for investors:

A temporary VAT cut

Top among the Treasury’s options is a temporary cut to the rate of VAT. The thinking behind this move is that it could encourage a nervous public to start spending in shops, restaurants and pubs. The move would be good for consumers and investors alike, encouraging spending and increasing the revenues of firms hit hardest by the crisis.

The problem with the plan is that it’s expensive and it might not work. If people aren’t spending because they are scared of contracting or spreading the virus, a small adjustment to VAT is unlikely to encourage them to start spending. Also, the Institute of Economic Affairs estimated the government loses £7 billion of revenue for every percentage point it reduces VAT. That is a lot of revenue for the government to give up on a plan that could failwhen concerns about debt and the deficit are mounting.

Bringing forward infrastructure spending

Spending on infrastructure is a good old fashioned way to get the economy moving. Officials in Downing Street are keen to use the delayed National Infrastructure Strategy, worth around £100 billion, as part of an economic stimulus with them hoping to get projects started as soon as possible. This is positive news for infrastructure supply chain investors, as well as for those with assets in the north of England and Midlands where much of the spending is expected to be targeted to shore up support in seats won by the Conservatives in December 2019.

While infrastructure spending can help the economy recover, to do so, it needs to happen soon. However, large projects that will do the most to stimulate the economy are the most difficult to start quickly, often taking years to get off the ground. The government is searching for projects that can be completed in 18 months, but even these smaller projects will struggle with the twin problems that there is a shortage of skills for many of the jobs the projects would create and that the government’s own planning rules are making it difficult to start projects quickly.

Cutting National Insurance Contributions (NICs)

To try to prevent an unemployment crisis, the government is considering a cut to employer’s NICs, or more radically implementing a temporary NIC holiday where employers don’t have to pay NICs on newly hired employees. After employees’ wages, employer’s NICs are the biggest cost to firms, reducing this cost would make it cheaper for firms to hire new employees and keep furloughed workers on the payroll.

A cut to employer’s NIC would be popular with employers and investors alike and has been endorsed by the former Chancellor Sajid Javid. However, if the combination of social distancing requirements and Covid-19 induced changes to consumer behaviour means that millions of jobs don’t exist anymore, a cut to employer’s NICs will do little to stem the tide of unemployment. The UK’s labour market is flexible enough to reallocate workers in these non-sustainable jobs to new roles, but this will not happen quickly. Also, while uncertainty over how long we have to live with the virus remains, businesses will not know which jobs will be viable over the long-term.

Cutting Stamp Duty

An often criticised tax, Stamp Duty has been claimed to create friction in the housing market, preventing growing families move home and stopping older people from downsizing. By cutting Stamp Duty, Rishi Sunak would be able to offer a significant boost to the home moving sector which would in turn increase spending in other areas, as well as create a more flexible labour market.

Think tanks such as the Centre for Policy Studies and Onward have recently called for reforms to Stamp Duty, with the latter suggesting Stamp Duty should be abolished for all homes worth less than £500,000. Choosing to limit the Stamp Duty cut to homes valued at less than £500,000 would make sure that the benefit of the cut is aimed away from the most well off individuals and would limit losses to the Treasury. Such a cut would benefit investors involved in the housing market, as well as those with assets in the home improvement and retail sectors, given that home moving is a stimulus to demand in these sectors.

There are no easy answers for the Chancellor, but there are certainly changes that could be made to help individual parts of the economy. While some of the options available will be costly, the government is likely to take the risk given the current exceptional circumstances. The unfortunate reality for the government is that the one thing that would allow the economy to grow unhindered is for the virus to be completely contained, but there is little sign of that occurring any time soon.