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Confidence tricks, cash for clunkers and tax credits

26 May 2020  |  Dominic Mills 
Confidence tricks, cash for clunkers and tax credits

Dominic Mills examines the strategies - past and present - that could kick-start consumer spending and reboot the ad market

Confidence is a funny thing. Retail sales fell by 18.1% in April; Rishi Sunak acknowledged a recession was inevitable (as if he could do anything else); and at the weekend Dominic Cummings hammered another nail into the coffin marked ‘Government Competence’.

And yet elements of confidence are visible as businesses look forward. The predicted UK PMI Index (a cross-sector study of purchasing managers’ intentions) for May rose 8 points to 40.6, up from April’s all-time low; the FTSE 100 was this morning above the 6,000 mark, 20% or so up on its 4,993 level on March 23; the Dow Jones closed last Friday on 24,465, about 30% up on its 23 March close.

Closer to home, Campaign reports signs media buyers are preparing to return to the fray, pitches continue and agencies plan phased returns to office life.

Last week I noted that, while advertising was a sign of confidence, on its own it might not be sufficient to fire up the demand that will give the economy the shot in the arm it needs.

Former planner and now behavioural scientist Richard Shotton offered a different perspective, arguing here that changing buying habits meant that consumers were open to new things and therefore presented advertisers with a rare opportunity to persuade them.

So what else might help? Look back to 2008-9, and we can see a couple of initiatives that made a difference then and could be repeated now. First, the ‘cash for clunkers’ scheme in which motorists could trade in their old cars for a new one and get a £2,000 discount (half from the government).

Sales rose by about 30% and there were some environmental benefits as guzzlers were taken off road (on the downside many of the new cars were diesels and what have now proved to be dodgy finance schemes came into their own).

But cars are good because the industry’s extended supply chain means the benefits trickle down through the economy. And the scheme undoubtedly gave manufacturers something to say and therefore a reason to advertise.

A modern-day version, however, would surely be targeted at electric cars, although even that would incur the wrath of hard-core environmentalists.

Second, the Labour government cut VAT by 2.5 percentage points, helpfully just before the 2008 Christmas shopping season. Given that the UK economy is closely linked to consumer spending (more so, for example, than Germany’s) that again would help.

A third initiative was to cut stamp duty on homes under £175,000, a move to kickstart the housing market from the bottom up.

Like cars, an active housing market spreads benefits throughout the economy — kitchens, white goods, furniture, gardens and so on. And it gives advertisers both something to piggyback off and a reason to trumpet their wares.

And now a new idea has been floated by the Advertising Association: tax credits for advertisers.

It’s an interesting idea. Media owners would of course be delighted. Advertisers humming and hawing might be tempted back to the market. And, assuming proper social distancing rules can be implemented, it could give a shot in the arm to commercials production. An unintended consequence, it should be noted, might be a larger-than-expected increase in media prices.

Of course, this isn’t going to happen overnight. The proposal has to wend its way through the DCMS before it gets to the Treasury, where it will be subject to endless cost-benefit analysis as well as fight competing claims from different sectors for their own leg up.

Its success, I guess, will depend on the industry’s ability to persuade government that it will make a significant difference to consumer spending. That may be hard to prove given that, in normal times and mature markets, advertising spend usually follows consumption.

But these are not normal times. The one thing the government won’t want to do is choke off any recovery by sitting on its hands. And while the net cost of a tax credit for advertising may be low when calculated against the tax revenues generated by consumption and production, its real benefit may be the way it signals confidence.

As we know, even if it’s a smoke-and-mirrors trick, confidence drives confidence.

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01 Jul 2020 

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