How should the Government roll back its support in a way that allows growth to occur across the country?
The Government was swift to bring in a number of policies to support businesses as a result of the Covid crisis. But how should it roll back this support in a way that allows growth to occur across the country?
There is no easy answer to this, but the timing of the roll back of these policies, as well as what replaces them, will have major implications for the nature of the recovery.
This briefing sets out principles on how this should be done to help support the recovery across the country. It makes three main recommendations:
This briefing proposes a framework for policymakers to think through what is a complex challenge, and splits the response into three phases, summarised in Figure 1. We make a number of policy suggestions, and would welcome conversations to further these or other ideas in the coming weeks.
Figure 1: Summary of the policy framework
The two main reasons why businesses will fail as a result of the current crisis is that either that they are fundamentally sound businesses with severe short term cash flow issues, or that there is a longer-term problem of a lack of demand for their products or services.
The challenge for the Government in removing the short-term support they have put in place is to do it in a way that does not cut off support while the former category of business finds its feet, while not prolonging support for the latter, which both delays people moving to another job where possible and is not a great use of taxpayers’ money.
A three-phase approach helps us to understand how to do this. We are currently in Phase I, where a number of businesses are closed due to lockdown and those that can work from home continue to do so. Phase II is a transition phase, in which the Government should start to vary its approach by sector. Phase III should represent a shift in all policy away from supporting the business to supporting the worker.
The lifting of lockdown for pubs, cafés and restaurants should signal the move into Phase II. By this point, all retail will have opened, schools will be operating, cafés, bars and restaurants will be able to trade once more (albeit with restrictions) and most people will in principle be able to go back to work.
Phase II is a transition phase lasting no longer than two months. In this phase, the challenges that businesses face in trading are not the same so policy support should vary too.
To understand why the approach should vary by sector we need to split businesses into two categories.
The first set are local services businesses, such as shops, cafés and bars (think your local high street). They sell very much to a local market so they depend on the amount of demand in the local economy. This demand is determined by the amount of money coming into the economy. And the amount of that money is mainly determined by the performance of a second set of businesses – exporting businesses. These are businesses concentrating on activities such as advertising, manufacturing and software development companies that sell beyond their local market and bring money into the local economy.[1] Box 1 sets out how these sectors may be defined.
Box 1: Defining local services and exporters |
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In practice, there is a grey area between those companies that ‘export’ and those that do not. For example, some law firms will deal only with local property conveyancing and criminal cases, while others will deal with issues for multinational firms. To deal with this, the Government should identify those sectors that are most likely to be local in focus. This would include food service activities (bars, cafés, restaurants), retail, arts, entertainment and leisure and personal services (such as hairdressers). |
[1] Other sources are public sector jobs, income from investments and benefits minus taxes.
Two factors will affect how quickly trade picks up for local services businesses. The first is how their area’s exporters have fared during the crisis. If their order books have not been affected to any great extent, then their workers have continued earning their full wages, and local demand should not have been affected in any great way. Even those that have, have had access to support from CJRS. The result is the cafés, bars and restaurants in an area still in principle have a market to sell to.
The second is how long it takes for confidence to return for potential customers to leave their homes and visit the local high street again. Lifting lockdown does not mean that people will return back to ‘normal’ living overnight. The use of real-time data can help guide this, as Box 2 discusses.
Box 2: Use of real time data |
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As well as offering much needed support, the CJRS and other schemes are generating huge amounts of valuable, granular, real time data on how the crisis is affecting economies across the country. In particular, in conjunction with the real-time Information data that HM Revenue and Customs now collects on jobs, it has the potential to reveal how hard the export sector of a local economy has been hit with implications for local services, where removing CJRS is likely to have the largest impact and the longer-term impact of the crisis on the economy. Unfortunately, this data is not currently made available, even at the national level. The Government should move to make use of this hugely-valuable resource by publishing the data by sector in each local authority. A second data source that will give insights is mobile phone and card payment data which will show how people return to spending money on the high street. Centre for Cities will be tracking how quickly this process occurs through its Recovery Tracker, which will look at how people are returning to the country’s 62 largest town and city centres. |
This has two implications for how policy supports local services in Phase II. The first is to extend the support that exporting businesses received in Phase I into Phase II.[2] This will mean that policy will continue to provide a safety net for an area’s export base. These businesses are strategically important because their performance is crucial for the longer-term performance of an area. In Edinburgh, they account for 24 per cent of employment but 43 per cent of output; in Burnley it is 28 per cent of all jobs and 49 per cent of output; and in Reading it is 30 per cent and 51 per cent respectively.
They’re important for local services because the money they bring in supports demand for, and jobs in, shops, hairdressers and beauty salons. Local services account for almost half of all jobs in Edinburgh, Burnley and Reading.
[2] This could be done alongside the tapering of support recently announced by the Chancellor.
The second is that the focus of direct policy support for local services businesses should shift from supporting costs (through paying wages, for example) – because they are now able to trade again – to encouraging demand to return. This means that the CJRS in its current form is removed for local services and replaced with policies to support demand.[3]
There are a range of options. The first is a temporary VAT cut. While this may encourage spending, it will not necessarily be spent locally. This is not a bad thing for the national economy – money spent with Amazon or a local shop contributes to national output. But if the goal is to help sustainable local services to find their feet again, this will be a fairly blunt approach.
A second could be temporary cuts for specific types of business, such as cuts to alcohol duties for pubs. The benefit of this is that it would be much more likely to be spent locally. The downside is that it is limited in its focus as only a handful of goods are subject to specific duties.
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 businesses back towards their sustainable positions before the crisis because there is value to having these amenities available, then this short term approach may be the most effective.
There are a number of ways to do this. For example, it may want to issue vouchers on a weekly basis, and they are valid for only one week at a time, in the way supermarkets issue time-limited vouchers for money off weekly shops. Or, instead of giving every household vouchers, it could run the equivalent of a lottery where a proportion of households ‘win’ vouchers each week. Guided by data suggested in Box 2, it might want to target the scheme on areas where demand is lagging.
A further challenge for these businesses will be to operate under social distancing rules. To address this, local authorities could ease planning rules to allow cafés, bars and restaurants to temporarily take up space rent free on pavements and parking spaces 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.
[3] There may be some special cases to this. Theatres for example may be deemed to require special treatment because of the particular way they are affected by social distancing.
This approach no longer offers blanket support to local services. Instead, it puts decision making in the hands of the customer. The implication is that, if for example people no longer want to visit a cinema (assuming all safety concerns are addressed), then the cinema will no longer receive public sector support beyond the business rates exemptions that the Government may choose to keep in place.
Where this happens among local services businesses, the CJRS should transition from its current form to an employment and skills scheme, giving sustained support to those who find themselves unemployed because they are no longer covered by the CJRS. There are a number of options here.
One option is to create a Future Jobs Fund or New Deal style system, which broadly aims to get people back into work through coaching and job placements. This could be coupled with a Government push on retrofitting homes to improve energy performance, which would create such job placements.
Another option is to create an Adult Learning Account that gives each unemployed person a grant to retrain through their local further education college. The amount that each course is subsidised could be varied according to what the Government wants to promote. For example, training schemes geared towards the green economy could get greater financial support than hairdressing.
If there are businesses – be they exporting businesses through the CJRS or local services through demand side policies – still reliant on Government support at the end of Phase II then this suggests that there has been a more fundamental fall in demand for their goods or services. Given this, policy support should complete the switch from supporting the business to directly supporting the worker.
At this point, the CJRS should also end for exporting businesses. From this point on, there is no direct support for either exporting or local services businesses, and all support is geared towards the worker.[4]
While the Government has offered unprecedented support during the crisis to keep otherwise solvent businesses from collapsing, those businesses that have not been able to trade during lockdown have built up debts, particularly rent arrears. For businesses that may make modest profits, such as a café, paying back this debt may be very difficult. Policymakers will need to further consider if they deem it necessary to deal with this debt, for example through paying it off or trying to mediate so that the business and the landlord share the burden of cost, rather than it all falling on the individual business.
Most of the policy options set out above are national in focus. This is because national government is effectively operating an insurance scheme that is best done at this level.
The role of local government should focus on the management of a local economy and as a coordinator and disseminator of information from national government to businesses. In particular this means adjusting planning rules temporarily to help businesses trade (as suggested above), dealing with the safe movement of people through high streets and helping public transport operate under the constraints of social distancing.
This does not preclude other more direct interventions to help businesses and workers, but this must clearly be additional to the national level support available and be clear as to why further support is necessary. Data sources such as those set out in Box 2 will be crucial to this.
[4] An exception here would be if the Government deems continued support for a specific sector necessary because of the unique circumstances it finds itself in. Aviation may be a candidate.
Those places that will feel the longer-term impacts of the downturn will be those where exporting businesses have closed, with knock-on effects on local services companies. This poses a longer-term challenge for policy of attracting investment from new exporting companies. Doing that requires a longer-term focus on skills, planning and transport that the Government was about to begin under the banner of ‘levelling up’ before the crisis hit. This will need to be returned to and continue once recovery is sustained.
It may also be helpful at this point for the Government to set out its 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. This will help to guide businesses as they potentially reshape their business models as we all emerge from this crisis.
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