The UK’s economic recovery will be investment-led and will not need more consumer incentives like the Eat Out to Help Scheme to recover, the Chancellor has said.
Rishi Sunak told MPs on the Treasury Select Committee he expected the levels of pent-up demand built up during the pandemic to be enough to trigger a recovery in consumer spending.
Experts predict middle and high income households have saved a combined £180 billion since the pandemic and expect to spend at least 5%, or £9 billion, when restrictions ease.
He said: “I think we probably now have higher confidence that there will be consumption-led recovery even without intervention… Consumer confidence is at different levels and there’s actually a lot of pent-up desire.
“Investment is different and has really suffered. It’s down 20% year on year and unlocking that is probably something where policy can make a real difference.”
He said he hoped a new super deduction plan that pays £130 to businesses for every £100 invested in plants and machinery will address years of chronic underfunding.
It will be financed by a rise in Corporation Tax in 2023 from 19% to 25%, which Mr Sunak defended as still being competitive among other developed nations.
Answering questions on last week’s Budget, he also revealed that struggling businesses will be able to start claiming cash from a new £5 billion fund from April 5.
Details for grant applications will be published in the next few days and Mr Sunak urged councils to ensure the delays seen over previous grants and support are not repeated.
Some local authorities are still sitting on vast sums meant for businesses forced to close and the Chancellor admitted support packages in the past had been too piecemeal, making it hard for councils to process.
The Chancellor said: “What we’ve said to councils is – you won’t get the new amount… until you’ve spent the money you’ve got.
“In their defence they will say there are too many grant schemes and fair enough.
“That’s why when we did the new one we wanted to do as a one-off grant, which is much easier for councils; to do that (process it) quickly and get it out the door.”
He added it was too early to say how much scarring the economy could face.
The Government’s independent experts, the Office for Budget Responsibility (OBR) estimate GDP (gross domestic product) could take a 3% hit. The Bank of England predicts around 2%.
Mr Sunak said: “Given the nature of this shock I think it’s fair to say no one high precision on the exact degree on as far as it will be.”
He explained that the scarring will be dependent on how successful the furlough scheme has been and ensuring businesses do not become insolvent.
The Chancellor added: “That’s the economic rationale for the policies. And if when they reopen and bounce back to life as the way they were, then we minimise the scarring in the long term.”
As a result of the uncertainty, the Treasury has not set fiscal targets – as required by the OBR – but Mr Sunak suggested these could be laid out by the end of the year.
He added: “Once we have a bit more certainty about the medium outlook, that would be the appropriate time. That might be towards the end of this year, all being well, but I wouldn’t want to 100% guarantee that as we’re dealing with a heightened time of uncertainty.”
MPs on the committee and economists giving evidence earlier in the week have criticised the Treasury for not producing additional Covid-related spending costs beyond 2022.
Committee chairman Mel Stride said to Mr Sunak that if he was Chancellor he would be “very worried about how realistic the spending figures are”, with “no explicit provision” for ongoing coronavirus spending
He added: “Is it just not the case that the kind of numbers you’ve got in there on spending are unrealistic and are just going to come under unbearable pressure over the coming spending round and the years ahead?”