The biggest bailout in history?

What has happened?

Within the space of just a few days, the world has woken up to the fact that we’re facing a great global depression, says Martin Wolf in the Financial Times. Coronavirus lockdowns worldwide have already seen supply and demand fall, and collapsed a wide range of spending, especially on entertainment and travel. Many workers, especially self-employed workers, face a prolonged period of no income, and “many households and businesses are likely to run out of money soon”, says Wolf. “Even in wealthy countries, a large proportion of the population has next to no cash reserves.” And the private sector – in particular  the non-financial corporate sector – has also “gorged itself on indebtedness” (see page 5). Central banks have cut rates hard, but the onus is now on governments to take fiscal and financial measures to manage the crisis and protect firms and workers. 

What has the UK done so far?

As of Wednesday afternoon the focus had been mostly on firms rather than individuals, although the chancellor, Rishi Sunak, has signalled that more announcements are imminent. Last week, in his Budget, Sunak announced £12bn of emergency fiscal measures to support businesses, plus the abolition of business rates in hard-hit sectors for a year. This week, he ramped that up aggressively, with a further £20bn of direct stimulus, including £25,000 cash grants for small businesses in the hospitality, retail and leisure sectors, and he extended the rates holiday to larger companies in those sectors. He also announced (as yet unclear) support for airlines.

What else?

The direct stimulus is in itself pretty big, amounting to 1.5% of GDP. But Sunak also announced £330bn in soft loans and loan guarantees to businesses hit by the pandemic. That’s equivalent to 15% of GDP, and amounts to state backing for businesses on an unprecedented scale. The government appears to have listened to the Office of Budget Responsibility, which (notwithstanding its name) urged its masters to not be “squeamish” about turning on the spending taps and borrowing for Britain. As Sunak put it, this was “not a time for ideology and orthodoxy”. Or as Faisal Islam put it for the BBC, this is “a wartime effort, with wartime deficits to cover it”.

Will it work?

In some respects even the £330bn package is merely a “large sticking-plaster”, says Nils Pratley in The Guardian. Loans can alleviate cashflow crises where companies are confident that demand will return, but a “loan is not a handout. Some employers may decide it’s better for them to shed staff or shut up shop, the behaviour Sunak is trying to discourage. The threat of mass redundancies looks large, with effects that could last years.” What the UK has not done – unlike France and some Scandinavian countries – is to try to prop up the economy by directly underwriting firms’ payroll costs. That could come next. For example, the government in Denmark has already told firms that it will cover 75% of the salaries of workers who would otherwise have been laid off, for up to three months, and to the equivalent of up to around £3,100 a month. 

How much would this cost?

Supporting half the UK’s monthly wage bill would cost the state about £40bn a month, according to estimates by Close Brothers Asset Management. “This is the sort of protection that might be required to ensure that, when we come out the other side, consumer demand returns to pre-crisis levels and the economy isn’t damaged beyond repair,” argues Robert Alster, the group’s investment chief. That kind of intervention – yet more unprecedented and statist – could mean higher taxes for all down the line (although that depends on how it ends up being paid for – see below for more on that). But it’s the kind of policy that may now be on the table in an effort to stop what we all hope could end up being a relatively short recession from becoming a far deeper depression.

What else is being done?

On Tuesday, Sunak announced a three-month mortgage holiday for those who need it, and on Wednesday, Boris Johnson promised emergency legislation to protect private tenants from eviction. Sunak is also in talks with unions and business trade bodies about employee support. Meanwhile, new Bank of England boss Andrew Bailey said that the UK central bank will effectively lend unlimited amounts to large UK companies via its new commercial paper facility – companies issue new short-term bonds (typically used to finance day-to-day operations) and the Bank will buy them (although the debt does have to be investment grade – ie, the company needs to be creditworthy). “We didn’t put a limit on [the facility],” Bailey told the FT. “We didn’t announce it was ‘X’ because the reason for that is we don’t know.” The scheme (known as the Covid Corporate Financing Facility) will run for at least a year.

What else could the government do?

More broadly, the crisis has led to a revival of long-running debates about universal basic income and helicopter money (ie, stimulating demand by giving cash directly to citizens). In the US the government is considering the latter. And here in the UK, the FT reports that Bailey has not ruled out “creating money to finance government projects”. This would be a manifestation of MMT (Modern Monetary Theory) whose proponents argue – to put it very simply – that as long as a country has its own currency, the only restraint on governments printing money to fund their own spending, including cash handouts to citizens, is the rate of inflation. That still sounds radical – but clearly not as radical as it did before this crisis began.