Rishi Sunak on Tuesday ripped up his Budget package of support measures to limit the economic fallout from the coronavirus pandemic just six days after announcing it. What came in its place was significantly more generous but also, according to the chancellor, not the final word.
The government has heeded the advice of the Office for Budget Responsibility, the fiscal watchdog, “not to be squeamish” about throwing money at the economy. It was “not a time for ideology and orthodoxy”, said Mr Sunak, but rather “a time to be bold”.
Companies listening to the chancellor would be reassured by the increasing level of government support to deal with the coronavirus outbreak, but workers facing redundancy or lost income will have heard less to console them. Below are some of the key points in Mr Sunak’s announcement.
Public finance costs
Mr Sunak last week used the Budget to pledge a £12bn package of support to counteract the economic effects of coronavirus for companies, individuals and the public services.
On Tuesday, the chancellor topped that up with a further £20bn, plus £330bn of government loan guarantees if lending by banks to companies goes sour.
The direct spending is now worth roughly 1.5 per cent of gross domestic product and it contrasts with suggestions by Charlie Bean, one of the senior team at the OBR, that the government might ultimately want to replace any lost income for the economy with borrowed money to ensure the nation can restart without much scarring after the pandemic subsides.
This, said Sir Charlie, could amount to about 5 per cent of national income. “Let’s suppose the hit to gross domestic product is something like 5 per cent,” he said on Tuesday. “That’s what [the virus] has taken out, so that’s what you have to put back in.”
Bridging loans
The first element of the additional state support from Mr Sunak will come from access to credit for companies to tide them over difficult times in the months ahead.
The chancellor made it clear that the £330bn of government loan guarantees would be available from next week. This will not hit the public finances immediately and should be seen as fiscal insurance rather than stimulus.
It means companies, particularly large ones, will be able to borrow from banks at attractive interest rates as demand for their products and services falls sharply but they need to continue paying salaries, rent and taxes.
£25,000
Cash grants available to smaller companies in vulnerable sectors such as retail and hospitality
If demand for the loans exceeds £330bn — some 15 per cent of the size of the economy — Mr Sunak promised he would offer even greater sums. This is designed to ensure that banks keep lending to their customers.
In addition, he announced two further packages of state-backed loans. Larger companies will have access to short-term loans from the Bank of England by selling commercial paper, which the central bank will buy.
Smaller companies will have access to business interruption loans worth up to £5m, with no interest charged for the first six months.
Cash flow support
Loans will not be sufficient for many companies, some of which will not want to go further into debt, so another part of Mr Sunak’s package is therefore aimed at easing cash flow pressure on businesses.
Larger companies in the most heavily affected sectors, including retail, hospitality, theatre and music venues, will get a business rates holiday, eliminating some of the criticism of the Budget that it penalised big groups and they would go bust.
For smaller companies in these sectors, with ratable values of less than £51,000, Mr Sunak offered cash grants worth up to £25,000 each to help with rent bills. He said the money was not a perfect one-for-one match, but the grants would “provide a lot of cover” for rent bills.
The smallest companies in the most exposed sectors would have grants worth £10,000.
Help for workers
Mr Sunak was forced to admit that there was little in the £20bn package of support to ensure companies would continue to employ people.
The one concrete measure was a guarantee that mortgage lenders would offer a three month payment holiday while struggling borrowers “get back on their feet”.
In addition to the Budget’s more generous statutory sick pay, the chancellor pledged “to establish a bold and ambitious employment package”, but there were few details of this in his announcement on Tuesday.
Unlike in Denmark or Sweden, where governments have offered to reimburse companies for a high proportion of the wage bill of workers who would otherwise be laid off, Mr Sunak has no simple means of directing such support to companies quickly.
The chancellor came under pressure to explain what the government would do and he promised that there would be more action on this front in the coming days.
As experts from the Resolution Foundation and the Institute for Fiscal Studies, two leading think tanks, have told MPs this week, the UK social security or business support systems are not geared up to provide help to individuals quickly.
Paul Johnson, director of the IFS, said Mr Sunak’s package was not well targeted at saving jobs as paying people will remain as expensive as it was.
“Supporting employment might require a targeted package which included targeted cuts to employer national insurance contributions, a delay in increases to the national living wage, and increased support for individuals through universal credit,” he added.
