Loans are not enough: grants and equity will be essential to the next phase of the coronavirus bailout

The government's corporate bailout plan will have to shift from loans and debt-guarantees to equity and direct grants, if it is to carry corporate Britain through the coronavirus recession, says a new Institute for Government paper.

Published today, Bailout for business after coronavirus, written by former No.10 adviser Giles Wilkes, argues that the cost of supporting business through the crisis is easily affordable if it helps return the recession-scarred economy to growth. But the Treasury must avoid burdening companies with unpayable debts or propping up those with no prospects in the post-coronavirus economy.

Immediate, unconditional liquidity support may have been sufficient had the crisis been short and sharp. But with recovery no longer assumed to be just around the corner, ever-increasing loans may cause more harm than good. The Treasury will need a broader range of instruments, such as equity and direct grants, deployed strategically where they make the greatest difference to growth.

The report argues that what began as an act of national solidarity needs to turn into a considered programme for preserving the health of the economy. The government cannot help each and every company, nor can it endlessly rely upon loan financing in the hope that a quick recovery can float corporate Britain off the debts. Work needs to start immediately on the long-term task of recapitalising the corporate sector. 

The report recommends that the government should:

• develop a more radical economic package that moves beyond debt guarantees to forgivable loans, direct equity and further grants
• work with existing investors to keep companies alive while avoiding an unquestioning investor bailout
• resist the siren voices calling for ever more debts to be 100% guaranteed
• ignore calls to throw every other agenda into its bailout package
• start work on the new institutions to recapitalise Britain, such as a state redevelopment bank and a wholesale look at tax incentives for equity.

Giles Wilkes, the report’s author, said: 

“The chancellor won widespread applause for his prompt and lavish response to the coronavirus shutdown, and rightly so: an economy thrown into hibernation risks losing all ability to rebound. But "whatever it takes" cannot become "free money, no questions asked". Rishi Sunak's next move may need to see him becoming both more generous and yet more demanding: grant and equity support on the one hand, but only for those businesses that look likely to survive and thrive on the other."

Notes to editors

1. The Institute for Government is an independent think tank that works to make government more effective.
2. For more information, including data to reproduce any charts, please contact press@instituteforgovernment.org.uk / 0785 031 3791.