Business

When the pandemic comes to an end, the Chancellor’s problems may be just beginning

BY Douglas McWilliams   /  22 May 2020

A couple of years ago I highlighted the role of the ‘lifestyle economy’ where people were increasingly becoming musicians (up 80% since 2004), artists (up 121%), fitness instructors (up 144%) or moving into areas they see as more socially responsible like medicine (up 56%), vets (up 147%) or academia (up 53%).

At the time I argued that the increasing preference for such lifestyle jobs, rather than highly paid but high intensity jobs in banking or the professions, explained part of the national productivity shortfall. I estimated this had cost the economy 5% of GDP and £36 billion per annum of tax revenue in the previous decade.

It is hard to imagine that there won’t be a further such shift when we go back to work post Covid 19.

Commuting is going to be more difficult with social distancing and in any case, many have got used to living without it.

During the lockdown half of all jobs are being government-supported and when these schemes end many of the jobs will disappear. It could easily be that a third of all the jobs that existed at the beginning of this year will have disappeared within a year. While the young are likely to lose their jobs disproportionately, they normally find new jobs at near or equivalent pay fairly quickly. Older people who do lose their jobs stay unemployed for much longer and typically when they get reemployed do so at salaries about a third below those they earned previously.

Moreover, the new jobs that emerge post-Covid look likely to be heavily biased towards more technological occupations, though there will be some (supporting online shopping for example) that will employ a wider range of skills.

Many people will lack either the skills or the desire to go searching for replacement jobs that are equivalently high paying to those they lost.

At the same time, we have become used to spending a third less. Some are quite likely to have made the decision that they don’t need to continue with a high income, high pressure, high spending lifestyle, particularly if there are social distancing rules that make indulging in expensive pleasures difficult or even more expensive.

And the older amongst us have become more sadly aware, partly from the number of condolence letters we have had to compose in recent weeks, of our own mortality and the need to make the best of the only life we have.

And so it seems probable that many of us will trade income for lifestyle in four different ways when the lockdown ends.

Some will look for roles that are similar to those they previously performed but in their local area to avoid commuting. They will accept a reduction in pay (and implicitly productivity) for the reduced costs and time spent commuting.

Some will try to do the same job but appearing in their office or place of work on a more part time basis. Whether they will need to accept a reduction in pay will depend on how productive they are in this way (a few might even be more productive, though good luck to them if they try to wangle a pay rise on the back of that!).

Some will look for ‘lifestyle jobs’ that they had always wanted in artistic or other occupations.

Some will take the opportunity to care for people either generally or those who are particularly near to them.

I would be very surprised if the drop in national productivity and hence GDP from all this is less than around a tenth.

There will, of course, eventually be offsets. Some of the new tech jobs will be highly productive. And the shakeup we have seen gives the opportunity to mechanise sectors like fruit picking that have been allowed to become more labour intensive than necessary.  With less travelling there will be fewer gap years and time taken off to go around the world. In time the gains from these could even offset the loss of productivity from the increased lifestyle economy. But they are unlikely to emerge immediately.

But in the meantime, many people are quite likely to not to have to reduce their standards of living by much if at all it they choose lower incomes but more enjoyable jobs and reduced commuting costs.

But there is one person who will definitely be worse off. Income is taxed while lifestyle is not. Because the tax system is progressive, a 10% reduction in productivity reduces tax receipts by around 12%. So, the taxman will lose 12% of his revenue, about £100 billion a year.

So, on top of paying for the debts incurred during the pandemic and for any increases in health and social care public spending that are deemed necessary and for the deficit which was being incurred even before the pandemic started, the Chancellor will have to make up yet another shortfall. And with many of his sources of revenue like motoring taxes and higher rates of income tax close to maxed out, the bulk of any increase in tax raised will have to be paid by the majority of the population, not just the rich.

So, this is yet another reason why when the pandemic comes to an end, Rishi Sunak’s biggest problems may only just be starting.

Douglas McWilliams is founder and Deputy Chairman of the economics consultancy Cebr.


     Email

     linkedin      Email