Coronavirus budget bailouts make sense – but are not without risk

My IfG report into the government’s promise to cushion the blow of a no deal Brexit was published just five months ago. It feels like it was several aeons. It argued that no deal would bring a period of short-term disruption and a sudden dip, but one that a wise and resolute government was capable of bridging. And in case you need reminding, the report also warned of the considerable difficulties behind this proposal.

The more ebulliently pro-Brexit cheerleaders liked to see no deal as a “Nike Swoosh” – a sharp fall followed by a steady rise. But behind this cheerful imagery lies a far more complex picture. Not every business will emerge on a smooth upward path. For some, no deal would mean a few weeks of border queues or the need to retrain for a new regulatory system, but for others it could mark a permanent, structural change that no amount of finance can bridge. Any government support would be good money thrown after bad.

Moreover, intervention to help a struggling business is never an easy decision, but one beset with dilemmas about rewarding failure, distorting markets, and fairness. There is also the small question of what the government can actually afford to do. Ultimately, our advice pushed strongly against the very idea of a blanket bailout: notwithstanding some sensible leniency in the tax system, any interventions should be highly particular; shaped differently depending on the nature of the company distress; and best delivered in a targeted, conditional way.

Fast forward to the astounding first budget of Rishi Sunak, and his package of support for businesses hit by coronavirus appears to break most of these rules. This is a blanket bailout with loan guarantees; a total business rate holiday for low-value retail properties, as well as museums, art galleries and the like; and even a £3,000 bung to those extremely small companies already free of a business rate bill. I could construct a pretty good case for why Sunak is right to craft his support in this way, but it is a response with risks attached. It would also be a deeply unwise approach to handling a no deal Brexit.

Coronavirus could be the epitome of the V-shaped crisis 

Affordability is now a fairly elastic concept – what appeared unaffordable five years ago is no longer so, thanks to the changing whims of our chancellors. But unlike last year’s bland promise to support viable businesses, this package appears to be fairly well costed. It is not absolutely guaranteed to work, but it provides a sharp injection of relief at the very moment that cashflow and confidence will be at a low ebb for many businesses. Most expert opinion sees the impact of Covid-19 as large, but temporary, like a natural disaster that mostly leaves the basic structure of the economy unchanged. This is much more like the “Nike Swoosh” envisaged by those no-deal optimists last year, the sort of event where bridging finance makes abundant sense.

The structure of what Sunak has offered fits this model nicely – loans and grants for that section of the business community likely to be facing a cashflow crisis. In contrast, short term loans are a lousy way to support a company through a drawn-out structural adjustment such as the imposition of permanent trade barriers. Coronavirus is not an event any company might have anticipated. One of the major dilemmas around providing support for the disruptive effects of a no deal Brexit is that such support diminishes the incentive for that company to properly prepare itself.

The government spent all of 2019, with increasing vehemence, warning business that it needed to get prepared for exit day (October 31st) come what may. But it is hard enough to get a busy manager to download pamphlets about new customs procedures at the best of time, still less when Her Majesty’s government is promising cash help should things go awry. In the case of Covid-19, none of these concerns ought to apply. The damage to business is wholly out of their hands; retailers and hotels, clubs and gyms have no choice but to shut their doors. What this support will do, if successful, is keep alive companies that would otherwise wastefully go to the wall for no fault of their own. In preventing that, the government might also forestall the risk of a wider cashflow crisis as failing businesses stop paying their bills.

Coronavirus is relatively well-defined and there is little need for difficult judgement calls

The economic crisis brought about by Covid-19 is so sharp and visible that there is little need for a difficult judgment as to whether a swathe of companies in distress have been affected.

For no-deal Brexit, this was far from the case. Our earlier report outlined the myriad ways in which that event might have hurt a company, from higher tariffs and new trading barriers to queues at the border and wholesale loss of a market. Each of these might occur over a different time profile and hit a company in different ways, necessitating a different response. Mr Sunak’s budget appears to have been well-received, but the backdrop of Covid-19 and 10% equity market falls is a difficult time to judge any Budget definitively.

Two risks remain. The first and most obvious is that the V-shaped crisis goes U-shaped, and Mr Sunak finds himself on the hook for an endless series of asks during a deepening recession. The second is that companies find ‘temporary’ support awfully addictive. Helping small business in a crisis is the right thing to do, but also very politically appealing. This time next year, Covid-19 may be less of an event, but the big challenge of Brexit will still be there. Will the chancellor have the strength to withdraw this coronavirus support?