Key dates to watch as economy’s life support is removed - Capital Economics
UK Economics

Key dates to watch as economy’s life support is removed

UK Economics Update
Written by Ruth Gregory

The economy is on life support, but this can’t last forever. This Update highlights the key dates to watch as the policy support is phased out, in particular the end of the furlough scheme on 31st October and the winding up of a cluster of other measures in March 2021. Only when the economy has cleared these speed bumps will we have a true sense of how it is faring.

  • The economy is on life support, but this can’t last forever. This Update highlights the key dates to watch as the policy support is phased out, in particular the end of the furlough scheme on 31st October and the winding up of a cluster of other measures in March 2021. Only when the economy has cleared these speed bumps will we have a true sense of how it is faring.
  • The economy returned to growth in May, retail sales rose to pre-pandemic levels in June and unemployment has remained low. However, this is a measure of the success of policymakers in mitigating the effects of the lockdown. The real test will come as the economy navigates the speed bumps ahead caused by the phasing out of the government’s support schemes.
  • Table 1 highlights the potential speed bumps between now and the end of 2021. Three things stand out. First, the sheer number of bumps in the road – our list runs to 17! Some are bigger than others. The paring back of the job furlough scheme from August will probably prove to be particularly destabilising. Other key dates include the end of the status-quo Brexit transition period on 31st December and the reversal of the temporary VAT cut on 12th January 2021. Deferred VAT payments are due in March. And businesses will start paying interest on loans provided under the government’s loan schemes (CBILS and BBLS) in the spring of next year. Others are smaller, but taken together they will still influence the economic recovery.
  • Second, a cluster of policy measures are due to expire in January 2021 and even more will cease in March 2021. So if there is going to be a time when the unwinding of policy support undermines the economic recovery, it may be early next year.
  • Third, by the end of 2020/21, most of the economy’s life support will be switched off. Based on the Office for Budget Responsibility’s fiscal policy multipliers, the coronavirus policy interventions may have raised GDP by about 3.5%. If these measures are not extended or replaced by new policies, then the economy will lose this support in 2021/22.
  • These speed bumps have led to concerns about whether the economy will be strong enough to cope. Indeed, by the time the job furlough scheme is phased out, we think that GDP will still be about 8% below its pre-crisis level and employment will be about 4.5% lower. Even when most measures expire in March 2021, GDP and employment may be over 4% and 3.5% below their pre-crisis levels respectively. (See Charts 1 & 2.) This suggests that it may be too soon to pull the rug out from under the feet of households and businesses.
  • As such, it is possible that many of these temporary measures will be extended or replaced, perhaps in the Budget later this year. This might especially be the case if by then the virus is circulating widely in the UK, if GDP and the labour market are weaker than expected, or if any of the speed bumps have a particularly large destabilising effect on the economy.
  • Overall, this policy support was necessary and does need to be removed at some point. It is only after the economy has cleared the numerous policy speed bumps that we will get a clear measure of how well it is able to stand on its own two feet.

Chart 1: Real GDP (Feb. 2020 = 100)

Chart 2: Employment (000s)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Table 1: Policy Speed Bumps

End Date

Policy measure

Details

31st Aug. 20

1

Eat Out to Help Out (EOHO) Discount Scheme

Restaurant discount scheme (gov’t pays half of diners’ bills up to £10 a head from Monday to Wednesdays) ends in August.

30th Sep. 20

2

Future Fund

Scheme where gov’t matches equity funding from third party investors ends.

19th Oct. 20

3

Self-Employment Income Support Scheme (SEISS)

Closing date for the second taxable grant worth 70% of average monthly trading profits.

1st Aug. to 31st Oct. 20

4

Coronavirus Job Retention Scheme (CJRS)

From 1st August, businesses will pay National Insurance and pension contributions for furloughed workers. From 1st September, they will pay 10% of their salaries. From 1st October, 20% of their salaries. Scheme ends on 31st October.

31st Dec. 20

5

Brexit deadline

UK status quo- transition period ends.

12th Jan. 21

6

Reduced rate of VAT for hospitality, tourism

Reduced rate of VAT implemented on 15th July ends.

31st Jan. 21

7

Job Retention Bonus

A one-off payment of £1,000 “for every furloughed employee who remains continuously employed” until the end of January 2021 ends.

31st Jan. 21

8

Self-assessment tax payment deferral

Deferred self-assessment income tax and Class 4 NICS for July due.

11th Mar. 21

9

Coronavirus business interruption loan scheme (CBILS)

Businesses will start paying interest and lender-levied fees on government loans from March 2021.

17th Mar. 21

10

Covid Corporate Financing Facility (CCFF)

Liquidity support for larger firms will close to new takers from mid-March 2021.

31st Mar. 21

11

Stamp Duty Land Tax cut

End of nil-rate band for residential stamp duty land tax transactions from £125,000 to £500,00 from 8th July.

31st Mar. 21

12

VAT payment deferral

Deferred VAT payments from 20th March to 30th June due.

31st Mar. 21

13

Universal Credit and Working Tax Credit

Expiry of temporary £20 a week increase in the standard allowance of Universal Credit and the basic element of working tax credit.

31st Mar. 21

14

Business rate relief

Rate relief for eligible properties in the retail, hospitality, leisure and nursery sectors ends.

30th Apr. 21

15

BoE’s Term Funding Scheme with additional Incentives for Small- and Medium-Sized Enterprises (TFSME)

Four-year funding ends for new takers.

4th May 21

16

Bounce Back Loan Schemes (BBLS)

Businesses start paying interest and making repayments.

31st Dec. 21

17

Kickstart scheme

End of work placements for Universal Credit claimants aged between 16 and 24 that are “deemed to be at risk of long-term unemployment”.

Sources: OBR, HM Treasury, Bank of England, Capital Economics


Ruth Gregory, Senior UK Economist, +44 7747 466 451, ruth.gregory@capitaleconomics.com