The Ways the U.K. Economy is Responding to COVID-19 Differently Than the U.S.

As Chancellor Rishi Sunak laid out a range of measures today attempting to help protect the U.K. economy against what could be the worst recession in 300 years, how does that compare to what is happening in the U.S.?

Sunak announced a range of measures as part of his "Summer Statement", an address given in front of politicians in the House of Commons, laying out public spending plans.

He told MPs: "We're not just going to accept this. People need to know we will do all we can to give everyone the opportunity of good and secure work."

He announced discounts on food, changes to stamp duty (a tax paid by people buying properties) and companies receiving bonuses for retaining workers under plans to help the U.K. economy.

Newsweek subscription offers >

Both the U.K. and U.S. economies have had to deal with an unprecedented economic shock that saw production and consumption grind to a halt, as entire sectors of the economy were ordered to shut down to help stop the spread of the COVID-19 virus.

The U.K. and U.S. governments have now begun to focus on the second phase of the crisis, hoping that the worst stage of the health aspect has passed and the economy can restart, albeit among the backdrop of a "new normal".

So how do the approaches of Donald Trump's and Boris Johnson's administrations differ?

Borrowing

Newsweek subscription offers >

The U.S. has announced that it wants to borrow a record $3tn in the second economic quarter, which is five times higher than the previous quarterly record which was set during the 2008 financial crash.

Current U.S. debt is near $25 trillion.

Meanwhile, the U.K. borrowing rose to £62 billion in April, according to the Office for Budget Responsibility, an independent economic forecaster, and after the government borrowed a further £55bn in May, the U.K.'s public debt is now larger than the size of the country's economy for the first time since 1963.

Both the U.K. and U.S. now have levels of borrowing higher than their national income, their gross domestic product (GDP).

Randall Kroszner, a professor of economics at the University of Chicago Booth School of Business and former governor of the Federal Reserve says that the two countries are following similar paths when it comes to borrowing to fund spending on the economy, albeit that no one expected a consensus to be reached so quickly in Washington.

Rishi Sunak economy
The chancellor set out a range of measures in his summer statement speech to support the economy Getty

"In the U.K. system, in the parliamentary system the government can pretty much get through what it wants," he tells Newsweek.

"In the U.S., especially given that the House is controlled by Democrats and the Senate by Republicans, it's not as easy to get legislation through, so I think its similar in terms of the spending but the contrast is in the unexpected ability of a very partisan U.S. congress to be able to agree quickly to make such large expenditures."

Professor Kroszner also said both the U.K. and U.S. have a "very strong monetary policy response" and that in both countries, firms were trying to build their balance sheets because they know an economic shock is coming.

Unemployment

Both in the U.K. and U.S. unemployment has increased, with almost weekly announcements of firms cutting jobs.

The U.K.'s unemployment rate could soar to almost 15 percent of the working population, around 4.5 million, if the country experiences a second wave of the COVID-19 pandemic, according to the Organisation for Economic Cooperation and Development (OECD).

Those claiming unemployment benefit in the U.K. reached 2.8 million in May and according to the Learning and Work Institute, unemployment could surpass 4 million.

In the U.S., the unemployment rate stands at 11.1 percent, according to the Bureau of Labor Statistics. In April, a record 20.5 million American jobs lost their jobs.

There are fears that the true scale of the unemployment crisis in both countries is being masked by short-term government programs to subsidize wages and jobs.

In the U.K. the government announced the furlough scheme in which it paid 80 percent of employees wages, up to a limit of £2,500 a month, before it is wound down gradually from August, preventing millions from being unemployed.

The U.K. chancellor confirmed in the summer statement that this scheme would not be extended.

He also announced that the government would pay firms a £1,000 bonus for every staff member kept on for three months when the furlough scheme ends in October.

In the U.S., the government announced the Paycheck Protection Program, which provided small businesses with funds to pay up to eight weeks of payroll costs including benefits.

Professor Kroszner said: "In both countries, there's a very strong response to try to provide support to try to maintain jobs, so the furlough scheme in the U.K. as well as the paycheck protection program in U.S., were ways to provide support to maintain a job in an existing firm. In the U.S., a large amount of employment support was provided also.

"The unemployment rate in the U.S. went up much more rapidly and significantly, the unemployment rate has then come back down, but I think broadly there is a greater similarity in approach than usual.

"There's so much focus on trying to provide support to maintain a job in an existing firm, that's something that is unusual for the U.S., typically it's done just through the unemployment system, firms reduce the number of workers and people go into unemployment and look for other jobs.

"Given the restructuring of the economies that will be necessary, things like the transportation and hospitality sectors, those are not going to come back as they were before and if they do, it's going to be years and years before that occurs, so I think in both countries there needs to be a pivot from providing support for a job to providing support for households.

"Many of those jobs will not come back no matter how much support is given."

Apprenticeships

U.K. Chancellor Rishi Sunak announced support for apprenticeship programs, where people learn a trade while on the job, with businesses to be paid £2,000 for creating new apprenticeship places for young people and £1,500 for hiring apprentices ages 25 and over.

But apprenticeships are not as big a feature of the U.S. economy.

Professor Kroszner said: "Apprenticeships are a much more important feature of the labor market in Europe than in the U.S".

He also said that measures such as retraining the workforce through apprenticeships was not the same in the U.S as the country lacks the same infrastructure to support apprenticeships.

Support for culture and arts

The U.K. government has also announced an arts bailout program, worth £1.57bn designed to support museums, galleries, theatres, independent cinemas, heritage sites and music venues, a sector that has struggled under the lockdown.

However, in the U.S. there has not been the same level of focus on cultural institutions as seen in the U.K.

Kroszner said: "I'm on the board of the Chicago symphony orchestra, a major cultural institution in the U.S., and the initial programs for lending did not reach some of those major institutions, some of the smaller institutions have been eligible, but some of the major institutions haven't.

"But they're not getting the same focus in the U.S. as they are here from the chancellor."

Sunak also announced the launch of an Eat Out to Help Out initiative, which will see households given vouchers to use when dining out.

Taking place in the month of August, the vouchers will give households a 50 percent reduction on the meals, up to £10-per-head, on sit down meals and non-alcoholic drinks.

The vouchers can be used on Mondays, Tuesdays and Wednesdays.

Value-Added Tax (VAT) changes

In order to help the hospitality sector, the chancellor said that he was cutting VAT on food, accommodation and attractions from 20 percent to 5 percent from next Wednesday.

VAT is a form of consumption tax – that is a tax applied to purchases of goods or services.

This cut will apply to eat-in or hot takeaway food and non-alcoholic drinks from restaurants, cafes and pubs, accommodation in hotels, B&Bs, campsites and caravan sites, attractions like cinemas, theme parks and zoos.

Sunak said this "£4bn catalyst" would help protect "over 2.4 million jobs".

The U.S. does not have a system of VAT, however it does have a sales and use tax, which helps generate incomes for states and varies fro state to state.

The Ways the U.K. Economy is Responding to COVID-19 Differently Than the U.S. | World