MNI POLICY: UK Summer Statement To Leave Fiscal Picture Murky

-Statement By Treasury Head Won't Be Accompanied By New Fiscal Forecasts

-Statement Likely To Focus On Stimulus Measures; Tax Raising Plans Delayed

By David Robinson 

     LONDON (MNI) - The UK Treasury's Summer Statement to be unveiled Wednesday

by Chancellor of the Exchequer Rishi Sunak looks likely to contain a grab bag of

stimulus policies without any official update of the fiscal arithmetic, as

details of future revenue-raising measures are likely to be delayed until the

Autumn Budget.

     Media reports have speculated on a cut and a higher threshold for

value-added tax cut, or a reduction in the stamp duty on property transactions.

But it is doubtful Sunak will say much, if anything, about future plans to raise

revenue or wind down spending.

     The few details floated so far have met with criticism from economic and

fiscal think tanks.

     Tax experts have pointed out past experience suggests VAT cuts are poorly

targeted and may never be passed on in full by retailers while the lack of

detail on longer-term fiscal arithmetic means the statement will be of little

use in assessing the UK's fiscal position and the sustainability of its debt,

which has hit 100% of GDP.

     "Just to say we will have a summer statement is not enough," Jagjit Chadha,

head of the National Institute of Economic and Social Research, said last week.

     --DEBT-TO-GDP

     Interest costs have fallen despite the surge in debt-to-GDP, reflecting the

decline in term premia to near zero and real risk premia at exceptionally low

levels, Chadha noted. But without plans for tax reforms or a medium-term fiscal

strategy there will be no guidance on how the government would respond if debt

costs begin to rise.

     The UK is effectively without fiscal rules, with previous ones aiming for

budget balance beyond their sell-by date. As MNI has reported, Sunak could be

tempted to use debt interest and public sector net wealth targets, having

appointed a champion of the latter, Richard Hughes, as head of the official

fiscal forecaster, the Office for Budget Responsibility. But detailed rules may

not be in place until autumn.

     Torsten Bell, head of thinktank the Resolution Foundation, said Tuesday

that while Sunak says the expensive Job Retention Scheme paying the lion's share

of furloughed employees' earnings would end in October, there was no question it

would keep going if there was a second Covid-19 wave.

     The Resolution Foundation has proposed the government issue time-limited

spending vouchers to householders, to get round the problem that the better-off

tend to save cash handouts. A BOE-commissioned survey found a net near 20% of

households in the top quintile had increased savings while a net near 15% in the

lowest quintile had cut savings during the pandemic.

     But the chances of the Treasury being ready to run with a voucher scheme

now appears low.

     Absent surprises, the Summer Statement looks set to be a stepping stone in

the fiscal response to Covid-19 with further details to be fleshed out later in

the year. The Office for Budget Responsibility, will update its coronavirus

scenario analysis in its Fiscal Sustainability Report on July 14.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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