Risk £100 vouchers won't help economy, report says

Wednesday 02 September 2020

There’s a 60% chance that the Government’s £11m plan to gift £100 to every islander won’t be a fully effective way of stimulating the economy because recipients will use it to fund their normal shopping, a report by its investment advisers has found.

The ‘Spend Local’ pre-paid Mastercards will be sent out to more than 107,000 islanders’ home addresses next week.

Once activated over the phone or online, islanders will be able to spend the money anywhere in the local economy – apart from in bookmakers – before 23:59 on 31 October. 

The aim is to restore consumer confidence and get money pumping around the pandemic-hit local economy again following lockdown. 

But a report unearthed by Express has suggested that there’s a strong chance that the £11m investment won’t give businesses the boost they need, as many islanders may just use it as a discount for their ‘normal’ spending.

Pictured: The £100 voucher scheme is aimed at helping boost local spending.

It was prepared by the Investment Appraisal Board (IAB) and aimed to analyse each of the measures contained in the £150m ‘kickstart package’, which also included direct payments of £100 to 13,000 islanders from low-income households, a recommendation to drop employee Social Security contributions, deferred GST and Social Security contributions, and the creation of a £50m pot for funding critical infrastructure. 

It was then reviewed by the Treasury Minister, Deputy Susie Pinel, before she signed off on the package.

Assessing the voucher scheme, the report ranked both the risk and impact of “leakage” as 3/5.

“Whilst vouchers themselves can only be spent with local businesses and cannot be saved because they expire, people can reallocate their budget to use the voucher on goods or services that they were going to purchase anyway. The equivalent value of the voucher can then either be saved or spent on imports (e.g. internet purchase from overseas) such that no incremental increase in demand has been experienced in the local economy where this takes place,” the report read.

It went on to explain that, in order to mitigate against this issue, consideration was given to “restricting the vouchers to specific sectors that were more acutely affected by covid-19, such as tourism related businesses and retailers”.

However, the report concluded that this would not fully mitigate against the issue, as “even if sectors were drawn incredibly tightly, it is possible for vouchers to be exchanged for cash (potentially at a small discount) such that those interested in spending in a target sector do so with vouchers purchased from others. In this scenario, only the discount achieved would be incremental.”

It therefore concluded that the Government would need to put a robust communications campaign in place to ensure islanders spend their gift on ‘treats’ rather than regular purchases.

The IAB also warned that the vouchers’ two-month expiry “will not be able to be absorbed by the economy as it will not have capacity” and that, “alternatively, or simultaneously” the vouchers could lead prices to go up. 

The probability of this was ranked as 2/5, but the impact 3/5.

Explaining the ratings, the IAB noted: “Given that there are no sector restrictions and demand in retail and hospitality (potentially popular sectors for vouchers) is customarily lower during Autumn, capacity is not considered to be a substantial problem. Similarly, this will reflect a one-off stimulus so an upward pressure on prices would likely be temporary, and, whilst immediate demand might be less well impacted, firms benefiting from higher prices will still support the flow of income within the economy.”

Turning to the Social Security contribution changes, the report assessed the risk of leakage as 5/5 on the probability scale, with an impact of 3/5.

“Some of the additional income may not be spent in the local economy. It could be used for imports (e.g. internet purchase from overseas) or saved. Higher income households will receive the benefit and are likely to save some of it and/or spend it on imports/overseas,” the report said. 

It added that the risk “cannot be fully mitigated and will undoubtedly impact on the efficiency of the intervention”, but that some “material benefit” was still expected. 

The IAB said that tapering the benefit to those on “very high incomes” was considered, but that the approach was discounted. Again, the importance of communications in encouraging “citizens to spend the additional income they receive, and to spend it locally” was highlighted.

Of the Fiscal Stimulus Pot, the report said: “The current intention is for the fiscal stimulus pot to support the construction industry, provide funding for skills training and enable further investment in technology. Prior to the crisis, the construction industry was operating at close to full capacity so if it recovers robustly there is a risk that stimulus could crowd out private investment.”

In mitigation, the IAB recommended that the fund should be carefully aligned to “underlying economic performance to ensure the stimulus is appropriately aimed at industries in need of support.”

Despite concerns, the IAB recommended the allocation of £12.3m for the voucher scheme and direct payments to low-income families.

This recommendation was accepted by the Minister on the basis that "the threat of prolonged economic downturn and its impacts warrant the higher than normally acceptable risks inherent in the proposed measures being taken and accordingly accepts those risks."

In a press conference on Friday, Chief Minister Senator Le Fondré yesterday highlighted the importance of using the £100 voucher for a ‘treat’. 

Yesterday, as the Government shared more information about how the ‘Spend Local’ scheme will work, and teased that they may be topped up in future, he reiterated this message, saying: “This scheme will give the public a positive way to thank locally based establishments that have worked hard to adapt to the impact of covid-19 and support their customers in a safe way. 

“The outbreak of covid-19 has caused businesses across all sectors to suffer. And while the Government has provided support through a range of measures, we know that the best way to support businesses is to increase custom. 

“We hope that businesses and islanders will get into the spirit of this scheme.”