Brexit and coronavirus: economic impacts and policy response

The government should restrict access to coronavirus support schemes to businesses affected by the pandemic, rather than those adjusting to Brexit changes.

There are already signs that the government is going to allow Covid schemes to be used to cushion Brexit disruption. This report says the chancellor should instead design an alternative package of support to help businesses cope with short-term Brexit disruption, or allow those businesses special access to the existing Covid-19 schemes on a case-by-case basis.

Failing to do so risks poor value for taxpayer money and longer-term economic damage from delaying necessary economic restructuring when the UK’s terms of trade with the EU change in 2021.

The twin shocks of coronavirus and Brexit cover almost as broad a swathe of the economy as possible, affecting sectors relying on face-to-face interactions (the arts, hospitality) and cross-border trade (manufacturing) respectively. Some 69% of the economy is predicted to be ‘badly affected’ by at least one of Brexit and Covid-19.

In the absence of Covid, the government would never have introduced widely available, cheap government-guaranteed loans or schemes like the CJRS to handle Brexit disruption. While acknowledging that trying to limit access to the schemes will be politically difficult, the paper sets out four ways to help ensure that the coronavirus support measures are not inappropriately used to prop up businesses whose competitiveness is undermined by Brexit:

• Close schemes such as the CJRS earlier than planned, or impose new criteria.
• Restrict access to schemes to those who have already applied.
• Impose stricter eligibility requirements, for example keeping the CJRS and the loan schemes open only to businesses whose turnover in 2020 Q3 or 2020 Q4 was demonstrably below its level the previous year (say, 10% below).
• Provide different support to different sectors.

Schemes designed for short-term Brexit disruption should include government-backed loans – ideally on less generous terms than for coronavirus, although it may be quicker and easier simply to extend those existing schemes – and further tax deferrals. More bespoke intervention akin to that planned under ‘Operation Kingfisher’ in the event of no deal in 2019 may also be appropriate.