BAnks are mean and Rishi Sunak walking on water. At least that’s the narrative that prevailed until the end of last week. The dashing new Chancellor, the then cabinet star of the coronavirus, had assembled the Treasury’s arsenal to provide loans to UK businesses on an unprecedented scale. It was only the damn banks that kept the money from reaching its intended recipients.
This scenario now seems wrong. Sunak and the “continuation of action” of the Treasury announced Thursday evening to support struggling UK businesses was not a simple adjustment. It was a radical overhaul of a loan program that had glaring flaws.
Yes, the lending banks were probably too slow and painstaking, but they weren’t the main obstacle in delivering money to thousands of businesses. Rather, they were trying to implement a wobbly and complicated set of treasury creation.
Version two of the diagram is much better, which is a relief. The main reform relating to eligibility for Coronavirus Business Interruption Loan Scheme, or Cbils, the section intended for small businesses.
When first released, these government guaranteed interest free loans could only be offered to businesses that could not get financing in the normal way. This sparked outrage from potential borrowers who thought Sunak had promised them ultra-cheap loans, but then found out that banks first encouraged standard financing with interest and fees.
In the reconfigured arrangement, all viable borrowers can move directly to the juicier Cbils product. It could be a game-changer for solving individual business cash flow problems, but it’s worth asking how the Treasury miscalculated in the first place.
No. 11, it is supposed, wanted to limit the risk to public funds, a noble intention a priori because the government is responsible for 80% of any loss of a Cbils loan. But the requirement to assess companies’ eligibility for conventional financing meant that Cbils had no impact. As of Thursday evening, just £ 90million in loans had been approved to 983 companies – barely scratching the surface of the problem.
A similar point can be made about the controversial issue of personal guarantees on loans below £ 250,000. Some banks asked for guarantees at launch; some were not or were doing so in different circumstances. No wonder borrowers are angry. But the banks themselves were confused because the Treasury had not made it clear what it wanted. Friday brought the clear instruction not to ask for guarantees. It could have been given on the first day.
Sunak also had to admit that his original design had a large hole in the middle. Cbils loans were limited to companies with annual turnover of £ 45million or less, with other potential borrowers being referred to the Large Business Program overseen by the Bank of England. It didn’t work because midsize businesses thought they needed a credit score, which most don’t. So Cbils has now been extended, in effect, to companies with turnover of £ 500million, even though they will pay interest on loans.
Business groups applauded the Treasury for listening to the comments. They are polite. Many of the design flaws surely could have been anticipated if the Treasury had had a better idea of how small businesses think and act.
Sunak, it must be said, deserves praise for his “leave” program which subscribe 80% of salaries in the companies concerned. This is a really important – and necessarily expensive – intervention that will save thousands of jobs.
Nor should we pretend that designing a loan program is easy. The current crisis, unlike the financial crisis of 2008, is spreading to almost the entire economy. And, I repeat, the banks still have to move. But it must also be said: Cbils needed urgent improvement because its original design was poor.
Billionaires are enjoying the holiday. They don’t need more
The bill to support UK businesses during the crisis will be huge. It could not be otherwise. The government is paying 80% of the wages of millions of workers across the UK to minimize job losses and ensure the economy is ready to recover when the lockdown ends.
There will always be business failures – indeed, destruction has already started on the streets with the collapse of Carluccio’s and Laura Ashley. The only certainty is that action, in the form of the broad “leave” scheme, will cost less than inaction in the long run.
However, not all beneficiaries are the same. When a clothing retailer Arcadia put 14,500 employees on leave last week, Philip Green has become an indirect recipient of public funds. Or, strictly speaking, his wife, Monaco-based Lady Green, has been lucky as she is the owner of the struggling fashion empire that includes Topshop, Miss Selfridge and Dorothy Perkins.
This, to say the least, is appalling. The Greens collected a dividend of £ 1.2 billion from Arcadia in 2005, but are not required to return a single penny to the company under these circumstances. And there is no point in politely asking for a contribution. As we have seen with the BHS pension scheme, the Greens had to be chased by parliamentarians and watchdogs before agreeing on a Payout of £ 363million.
Unfortunately, there is not much the government can do. It is virtually impossible to design a leave plan that does not apply equally to all businesses.
Ministers can, however, take a hard line when overseas-based billionaires ask for help beyond the generous leave program. Virgin Atlantic, 51% owned by Richard Branson, has reportedly requested a £ 500million package of soft loans and credit guarantees. The answer should be simple: it’s your turn to put your hand in your pocket.
Ultimately, we must devote enormous resources to restarting the economy
There has never been a crisis like this. The outbreak of the coronavirus has crippled the advanced world, as governments have effectively shut down economic and social life as we know it. Unemployment is now starting to skyrocket as businesses run out of money amid forced shutdowns, with early indications that unemployment in the US and UK may extend beyond the depths of the Great Depression of the 1930s.
The jobs crisis is on our own initiative, an exercise in protecting the health of a nation at the expense of material wealth. It is quite correct that a compassionate society takes such an approach. But the impact of the lockdown should not be overlooked: millions of people face unemployment and hardship.
The comparisons with World War II and the Great Depression are overstated. Rather than attempting a large-scale mobilization, Covid-19 is overcome by suppressing the economy as much as possible. And, unlike the Depression, the hope remains that this crisis will be shorter than any other serious economic downturn in history.
But two historical comparisons should be kept in mind: the need for a New Deal similar to Roosevelt’s in the 1930s, or the Marshall Plan of the 1940s, to revive economic activity once the economy comes out. of hibernation.
When the dust finally settles on the emergency phase of the Covid-19 crisis – a moment hoped for sooner rather than later – the government must put as much weight in reopening the economy as in closing it.
In the short term, support programs are welcome, despite shortcomings that mean many still find themselves without adequate financial assistance, as the Conservative government temporarily abandons decades-old political dogma.
Failure to support those who lose their jobs in this crisis will only cost Britain even more in the long run, due to weaker economic growth and lost tax revenue.