Why the government's coronavirus support measures need to change

Matthew Lynn proposes three ways for the government to help the economy get through lockdown extra time.

Lockdown restrictions will not end next week, as originally planned, but will be extended for at least another month (see page 8). The economy will need more support to get through that. The hospitality industry will be badly hit. So will travel if most countries remain on the red or amber list. Many companies will postpone going back to the office and quite a few may cancel leases on expensive space; others will make working from home permanent. Already there are demands for the chancellor, Rishi Sunak, to step in with extra support. 

Furloughs might have to be extended, rent and rate holidays kept in place, and soft loans will have to be extended to businesses that are struggling to make ends meet. Many of the existing schemes started to taper away from the end of June. It is perfectly reasonable to extend that help if restrictions remain in place. But we shouldn’t pretend that every policy from the last year has been a success, or that every form of support can simply be rolled forward for another four weeks. Instead, this is the moment to make some significant changes – and start getting it right. 

1. Scrap the furlough scheme

As of last month, more than two million people remain on furlough even though there are widespread shortages of labour as the economy reopens. Many companies are calling for a relaxation of visa rules so they can bring in more workers from abroad. One in ten construction workers are being paid to stay at home doing nothing although output is above its 2019 level; a similar percentage of shop staff are at home, even though retail sales have been booming and high streets are open again. That is crazy. It is also very, very expensive for the Treasury and damaging for all the companies that can’t operate normally because they don’t have enough staff. The chancellor has already indicated that the furlough scheme won’t be extended any further. But he should go a step further and end it completely. If a company can’t reopen, then it is better for the staff who work there to be released to find a job elsewhere – there are plenty of vacancies. 

2. Start converting debt to equity

There are lots of bounceback loans available to companies that meet the criteria and the banks don’t mind offering more money so long as it is all backed by the government. But after 15 months of lockdown, many companies are already up to their eyeballs in debt. They no longer have any idea how it is ever going to be repaid. What they really need is equity investment. The government has already made a move in that direction with its Future Fund for relatively new start-ups. But it could easily extend that by offering to convert loans into equity for any business that wants to take it up on the offer. Who knows, maybe the Treasury will even end up with stakes in some valuable businesses? Even if in the end it has to write lots of equity holdings off, at least it will have saved some companies in the process.

3. Launch a blitz of legal reforms

Many existing laws were not designed for the extraordinary events of the last year. On top of all their other problems, many firms face a series of questions with no clear answers. Do staff have the same rights working from home as they did when they were all in the office? Is it okay to monitor them, and if so at what times? Should a business be allowed to insist on vaccination, or is that discrimination? What happens if someone refuses to come back to work because they are nervous about catching Covid-19? No one, including the lawyers, really knows right now. Over time, judges will probably decide. But we shouldn’t leave it up to the judiciary, nor should we leave firms in the dark over their rights and responsibilities. The government needs to make it clear what the law is. The last thing any business needs is legal uncertainty. 

Most Popular

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
Three companies that are reaping the rewards of investment
Share tips

Three companies that are reaping the rewards of investment

Professional investor Edward Wielechowski of the Odyssean Investment Trust highlights three stocks that have have invested well – and are able to deal…
19 Jul 2021
The future belongs to emerging markets – three EM stocks to buy now
Share tips

The future belongs to emerging markets – three EM stocks to buy now

Professional investor Carlos von Hardenberg of Mobius Capital Partners picks three of his favourite emerging-market stocks.
5 Jul 2021