The business bailout dilemma still awaits Rishi Sunak and the government

There is nothing like a bailout to kill the idealist in the government policymaker. Idealism argues for the state’s scarce resources being hoarded for situations of the maximum possible advantage: investments in the industries of the future, say, or aimed at some key government aim like ‘Levelling Up’ the regions. Realism points another way. The companies left in need of government help are, perforce, those rejected by the private sector, and not for being just too good for its money. Rather than win-wins, the typical bailout is about cutting losses and ugly compromise.

The Covid-19 crisis in the short run spared the government such dilemmas; as argued in our report, Bailout for business after coronavirus, the speed and indiscriminate nature of the initial economic collapse left little room for tricky judgments. The rule at first was simple: as many companies and jobs should be preserved as possible, by whatever means came to hand. But as the smoke clears, decisions await as to where the Treasury should aim its efforts.

Business debts are where the major problems lie

One of the myriad ways of picturing the national economy is to divide it into large sectoral balance sheets: government, household, financial sector, non-financial business sector, and “overseas” to denote the claims we might hold on the rest of the world (and vice-versa). Then the art is simply to guess which one you should be worrying about

Right now, the Treasury ought to be worrying most about the non-financial business sector, - in English, normal businesses like a factory or high street shop.  These have seen debt levels soar after four months of crashing revenues. TheCityUK, an industry body, has estimated the amount of unsustainable lending at up to £100bn.  

The other sectors might give the Treasury fewer sleepless nights. The government, while borrowing record amounts, is able to at historically low rates. The financial sector was in a strong position as a result of the tough regulation that followed the financial crisis of 2008-9. Households have in effect been forced to save, in aggregate, and many might even emerge from this crisis more flush with cash than they were going into it. This is to no small extent down to the government’s help through such schemes as the Job Retention Scheme.

The situation is highly novel and the reverse of recent history. Go back a few years and you can find articles fretting about giant corporate cash-piles, while households ran up greater debts and business investment stagnated^[1]. There is no reliable theory nor recent precedent for determining what is a dangerous level of corporate debt, or how the business sector will react to its debts in the recovery phase. In particular, the way debts have been suddenly accumulated in the micro-business sector is utterly unprecedented. On the government’s figures, the Bounce Back Loan (BBL) route accounts for £30bn of new lending since April – a figure that may well match the entire stock of outstanding loans to micro-businesses (those with fewer than 10 employees) going into the crisis.

The Treasury feels it has done enough to support businesses for now

Most of the headlines from chancellor Rishi Sunak’s July Statement were about the job market and his attempts to help specific sectors like hospitality (“Eat out to Help out”) and theatres. For business more generally, the statement largely restricted itself to a recap of the measures already taken, including the £27bn issued through the Coronavirus Corporate Financing Facility, £11.5bn made available through the Coronavirus Business Interruption Loan Scheme, £30bn through the BBL as well as a generous list of taxes forgone and easily disbursed grants, worth many billions more.

This is understandable – the figures for support are impressive, and there is a largely functioning financial sector capable of providing investment to businesses deemed likely to repay the risk. As emphasised in our report, generalised government support for companies facing insolvency in a recession is not the normal policy in the UK, and requires its own particular rationale to justify. 

It was possible to tell that the government felt it had no new such rationale since the last of these schemes, BBL, had been unveiled at the end of April. This was illustrated by the course taken by “Project Birch”, described in late May as a plan to take stakes in “strategically important companies”. A month later, only half a dozen companies were said to be in discussions for support from this programme, half of them in the steel sector – a longstanding recipient of state aid under conditions of duress. By the time of the July Statement, the project was not to be found so-named in the text. Instead it was replaced with a terse paragraph about “last resort business interventions” that emphasised how normal it is for such strategic support to be considered – and how onerous and conditional this support might be.

Naming something a ‘project’ might suggest it is a set of tasks aimed at a chosen end. Un-naming it signifies that the Treasury may believe that it is a project which causes more trouble than good. A pot of money devoted for companies of strategic interest risks setting up a public argument about what strategic means, leaving aggrieved losers in its wake. There is a place for long term strategic investments in business – it is called industrial strategy – but enmeshing it in bailout policy is fraught with difficulties. As the Treasury is clearly aware, it may encourage companies to distort their plans in a chase for supposedly easy state money.

At time of writing, the one agreed loan of Project Birch (£30m to a steelmaker) is small enough to be a rounding error on the table of government coronavirus interventions – £30m is 0.3% of the amount spent on the struggling test and trace scheme.

The Treasury is not yet addressing the dilemmas inherent in bailout policy

Even in the week since the July Statement, there have been numerous announcements of job losses, including such well-known names as John Lewis, Boots and Burger King. Clearly consumer demand, which business policy can dovery little about, is the dominant variable in determining whether more such jobs will go. By downplaying Project Birch, and keeping to his announced end to the Coronavirus Job Retention Scheme in October, the chancellor has sent a clear signal that he expects market forces to be the main decision-maker in the months ahead.  

But for Treasury thinkers hoping to be spared the dilemmas inherent in bailout policy, it is too soon for any sighs of relief. The sheer scale of the support the government has provided must have kept viable many tens of thousands of businesses that still face a reckoning in the months ahead. A million Bounce Back Loans have been agreed, and the government is yet to set out its policy on what will happen to those that go sour. There are some estimates that up to a half of them might, in which case the Treasury will be faced with the largest combined default in the history of UK business support, and the need to determine a policy to apply to hundreds of thousands of businesses and perhaps millions of employees.

The choice when it comes will be between write-off, equity conversion, or liquidation, and none of them are pleasant or easy to contemplate. Turning tens of billions of pounds of loans into a retrospective gift is unfair when so many other companies and people are struggling, but the great majority of micro companies are ill-equipped to take equity – and the government is hardly in the business of wanting ownership of a slew of high street retailers, hairdressers, pubs and gyms. Yet forcing companies into liquidation might knock the wind out of the recovery, too. Having put his arms around so much of the economy, Mr Sunak will find that letting go is the hardest bit.

1. See https://www.ft.com/content/379d917a-25c9-11e3-8ef6-00144feab7de , “UK companies sit on giant piles of cash”, Financial Times, 29 September 2013 or https://www.grantthornton.co.uk/globalassets/1.-member-firms/united-kingdom/pdf/publication/2016/working-capital-report-digital.pdf “The UK’s Cash Conundrum”, Grant Thornton, September 2016