There are a myriad of UK corona virus support schemes: for small firms, large firms, self employed, larger firms, sole directors, charities … no need for this confusion, all can be treated the same way!
More in the business press today about the latest HM Treasury initiatives to support businesses and non-profits through the pandemic.
There is further detail on the lending scheme for larger firms, those with revenue of over £45mn that do not qualify for the small business loan scheme CBILS. But this still has an arbitrary limit, maximum borrowing of £50mn. Also there is a promise of another new scheme to support venture capital financed startups.
The thinking, as far I can make sense of it, seems to be “government by press release”. The more initiatives we announce, the better we are doing.
This is damaging and confusing. Two key points are being lost in this welter of initiatives
- We need one scheme of government supported lending, not many schemes. Every organisation is being hit in the same way — an unprecedented and unforeseen loss of revenue. So we need one scheme providing appropriate funding allowing all organisations to survive the crisis. The amount of lending (as my “practical scheme” shows) can be based on revenue loss and basic accounting information.
- We need to acknowledge upfront that much of this lending will have to be forgiven. For business to survive, then around one half of this lending to smaller firms (less for larger firms) will have eventually to be converted to grants. If revenue is lost and essential spending not covered by grants then firms fail and economic recovery undermined.
Of course some may object, we can’t lend to every organisation, we cannot afford to forgive a large share of these loans.
No ! I have done some more calculations this morning, returning to the example of IAG the airline group in my SSRN paper of 21st March. This confirms my earlier national accounting based calculations. The required lending is very similar for large firms and for small. Moreover the amount required while large, is not unaffordable.
In the case of IAG I estimate that they will need to obtain external support (through furlough scheme and borrowing) of around £250mn per month through the crisis. While a bit larger, in relation to the size of the business, than my calculations for SMEs this is still less than one third of their pre-pandemic wages and pre-tax profit. Allowing for only limited government guarantees and investor contributions the amount of support is less than needed for SMEs. But £50mn is a laughably small limit for a firm of this size.
We will want to limit the amount of government guarantee for borrowing by larger firms and organisations (smaller firms need 100% guarantee to get the money out quickly, still not being done, the largest firms like IAG a 60% guarantee is enough). The conversion of loan to grants should, for the larger firms, also require investor participation, either cash or equity.
Extended this scale of lending to the entire economy, allowing for the different impact on different sectors (not all are hit as badly as airlines) and the different treatment of large and small firms, suggests external financing very similar to that in my NIESR policy paper no 15. In addition to the existing furlough scheme government loand guarantees of around 4% of GDP to support the entire economy for six months of lockdown (a little higher than I previously calculated). The amount of grant required grant funding (in addition to that already included in the furlough sheme) around 2% of GDP.