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Last Friday’s news that the economy shrank by 20.4 per cent in April has sharpened focus on how policy should help stimulate the economic recovery. This isn’t a simple task. But by understanding the different roles that sectors play in local economies provides a framework to simplify this problem. Centre for Cities’ latest briefing sets out what this framework should look like.
We are currently in Phase I – the immediate policy response. Phase II is a transition period, which should last no more than two months. And Phase III is a longer-term response, where policy fully switches from supporting businesses to supporting workers.
Phase II is triggered when lockdown is lifted for pubs, cafés and restaurants, meaning that at this point the majority of businesses in the economy can, in principle, trade.
At this point policy moves from a blanket approach for all businesses to a sectoral approach. This approach splits businesses into two broad groups because of the different roles these groups have in a local economy and the relationship between them.
Continuing to provide a safety net for the first group, exporting businesses – those businesses that sell beyond their local market, such as Rolls Royce or an advertising agency – is crucial for the longer-term performance of a local economy because these businesses bring money into it from elsewhere. They are the engines of prosperity for a local economy, and so are strategically important. So, policies such as the Job Retention Scheme (JRS) continue as they are for exporting businesses.
But the approach for local services businesses – those businesses that sell to a local market such as cafés, hairdressers and retailers – switches from supporting costs to encouraging people to spend. Indirectly these businesses benefit from the continued support for exporters, as this keeps money coming into a local economy which in part is spent on local services.
This doesn’t mean that people will leave their homes to spend this money though. And so policy may need to encourage this to happen.
There are a number of possible ways to do this. One is to temporarily cut VAT. Doing this is fairly indiscriminate, and skill will incentivise online shopping as well as spending on the local high street. This isn’t a bad thing for the national economy. But it may dampen its local impact. The second is to be more targeted, by reducing alcohol duties on pubs for example. But this only supports a small subsection of local services.
The third is to offer people time-limited vouchers to spend locally, either in the form of a lump sum or a discount on any spend. Centre for Cities is not a supporter of local currencies but if policy is attempting to restore sustainable businesses back to their pre-crisis positions, then a short-term voucher-based approach to boost initial customer footfall may be the most effective way to do this.
A further challenge for these businesses will be to operate under social distancing rules. To address this, and following Paris’ example, local authorities could ease planning rules to allow cafés, bars and restaurants to temporarily take up space rent free on pavements outside their properties, increasing their floorspace and allowing them to serve more customers. This would likely need to be done alongside road closures to maintain space for pedestrians. They could also ease restrictions around use classes of property to allow businesses to temporarily expand into adjoining properties where that property is currently vacant.
Crucially though, the JRS will no longer apply to local services businesses, and this will most likely cause some redundancies. To help address this the JRS should transition to an employment and skills programme, designed to give those struggling back into work the skills they need to get back into work.
There are a number of options here, ranging from a New Deal style programme introduced in the late 1990s or a Future Jobs Fund style policy introduced during the last recession, through to a skills scheme where every unemployed person gets a lump sum to retrain. To help achieve its own objectives, the Government could offer a larger lump sum for those choosing a course that is focused on the green agenda, for example.
Phase III removes all support for businesses, moving instead to support workers. If exporting businesses are still reliant on state support at this point, then it suggests that they are facing longer term problems with their business, rather than a short-term problem caused by the crisis. At this stage it is better for policy to support workers affected rather than continue to support the business. This means that the temporary spending support for local businesses stops. And the JRS for exporters also now ends, with workers who lose their jobs as a result moving on to the employment and skills programme the CJRS transitions into. The figure below summarises the approach.
Figure 1: Summary of the policy framework
It may also be helpful at this point for the Government to set out it’s longer term economic priorities to signal where it will be directing investment – for example the green agenda, or how it expects to spend its increases in R&D spending that have been promised. As businesses potentially reshape their business models as they come out of the crisis, these announcements may be a good steer.
There are a number of policy options to choose from in this approach. And much uncertainty still exists around how the virus will continue to spread. But this framework sets out a clear approach to tackling what is a complicated issue. And by understanding the different roles that sectors play in a local economy, it can help support the recovery up and down the country.
And once this is achieved, attention can once again turn to attempting to ‘level-up’ the economy, an issue that existed long before the current crisis, and will continue to be an issue when it passes.
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