Proposed Coronavirus Bailouts: Essential or Nonsensical?
Monday 8th June 2020
The coronavirus pandemic has had devastating economic implications. Social distancing measures resulted in the closure of high-street stores, whilst the impetus to work from home has led to an 85% fall in demand for once vital public services. UK GDP fell by 2% in the first quarter of 2020, the steepest contraction since the Global Financial Crisis in 2008. Forecasts suggest a huge inversion of the annual GDP growth rate, with some current estimates indicating that the UK economy will shrink by 35%. Globally, bailout efforts have reached $10 trillion, with the managing director of the International Monetary Fund Kristalina Georgieva suggesting that Covid-19 will lead to the ‘worst economic fallout since the Great Depression’.
The UK government’s economic response to the pandemic has been proactive, to say the least. Chancellor Rishi Sunak has stated that the government is willing to make interventions that are ‘unprecedented in the history of the British state’, as major companies in key sectors face bankruptcy. The government has pledged to pay 80% of workers’ salaries and reimburse the self-employed under its Job Retention Scheme and Self-Employment Income Support Scheme, which aim to prevent spikes in unemployment and ride out the short-term stagnation due to social distancing measures. This comes in conjunction with loans for small businesses and £20 million worth of tax breaks, all of which result in a fairly robust short-term response.
When it comes to big businesses things get a bit more complicated.
In April, the Bank of England agreed to directly finance the government’s extra spending in the wake of the pandemic. The government will not have to secure spending by issuing debts in the bond market, which allows for a huge commitment to fiscal policy measures. £330 billion has been committed to bailouts; the government is willing to spend the equivalent of 15% of UK GDP to stabilise major businesses. The scheme, known as the COVID-19 Corporate Financing Facility (CCFF) will offer financial support to large businesses by purchasing debt. The only pre-requisite is that companies looking for help must have previously made a ‘material contribution to the UK economy’. The CCFF has seen a significant uptake, lending to a wide variety of businesses in the UK; high-street giant John Lewis received £300 million, whilst German chemical company BASF received a bailout to the tune of £1 billion.
The all-encompassing plan seems fairly effective, prefaced on the idea of helping businesses which underpin the UK economy. However, there are significant shortcomings. In the first instance, the relative freedom granted to the government comes with little long-term purview. As the main insurer of debt purchases, the government are not only lending, they will also assimilate outstanding debt into the national debt should recipients default on repayments. In the long term this will result in the Exchequer servicing a higher interest bill, which will likely translate to increased tax burdens and reductions in public spending for future generations.
The government is justified in bailing out businesses to an extent; the crippling effects of the Global Financial Crisis offer the clearest support in favour of intervention. However, questions must be raised regarding the validity of the lending. Luxury brands are benefitting from the government scheme, despite the fact that their post-Covid demand prospects are low. Designers Chanel and Burberry received a total of £900 million, whilst manufacturer Rolls-Royce received its own £300m bailout. These companies would ordinarily account for a significant share of injections into the UK economy through consumption and income tax revenue, however it is unlikely that they will see a substantial pick-up in demand in the aftermath of the pandemic. As the UK heads into the largest recession since the Great Depression, is the government justified in spending vast amounts of money on industries which are unlikely to bounce back quickly?
The lack of conditions attached to the scheme has drawn further criticism. The demand for government funding has revealed a reliance of big businesses on state finance, so why aren’t the government doing more to tackle the issues engulfing the major industries? The £1.8 billion granted to aviation companies could have been delivered on the condition that airlines make a greater commitment to tackling rising pollution levels in the post-Covid era. Similarly, car manufacturers Honda, Nissan and Toyota received £1.04 billion in aid, which could have been prefaced on a greater impetus to increase vehicular efficiency and focus on the emerging market for electric vehicles. Environmental advocates have condemned this missed opportunity, especially in the wake of the environmental benefits which have been enjoyed as a result of the global push to ‘stay at home’.
The government is fully justified in bailing out businesses – it is essential for the UK’s economic survival. But in response to claims that ‘we can’t put a price on the future of the economy’ or that ‘we can’t afford not to’; we can, and we must. Businesses which comprise substantial sections of the UK economy deserve the help they have been given, but the government has missed the opportunity to engender significant environmental changes for the post-Covid era and has been too frivolous with its lending due to the unbounded backing of the Bank of England. The seemingly unlimited commitment to economic resurrection is reassuring for businesses, workers and consumers alike, yet the cost of extensive intervention will be borne by future generations as the gains made by previous ‘austerity’ are wiped out and the national debt skyrockets.
