Rishi Sunak has announced new support for businesses this afternoon.
I welcome his additional rate support relief.
His tiny grants for some smaller businesses are welcome, but wholly inadequate. These will go to 700,000 businesses. There are more than 5 million in all. What about the rest? And as yet no one has the slightest idea who will qualify for these grants, how to apply for them or when they will be paid. So as a business confidence booster they are utterly hopeless.
And after these points have been noted, all he has had to say showed not the slightest comprehension of the needs of business, or an undertsanding of how business works, or of how company law worked. But it did reveal desperation on his part that none of the impact of this crisis should increase the government's deficit. I will explain.
First, businesses that are making losses do not need loans. They either need new capital, or grants. When they are haemorrhaging cash and losses are piling high a loan does nothing for them. That is because loans have to be repaid, and a business in crisis cannot offer any assurance that it can do that. As such, by definition it does not qualify for a loan.
In addition, given the very low capital base of most UK businesses many that now need support will already be facing insolvency. In that case, it is illegal for a company director to take on a loan because they cannot guarantee repayment: it would be fraud for them to take the loan in that situation, and so they cannot do so. Sunak has completely failed to take into account the requirement of UK company law when offering this absurd package.
And what Sunak does not seem to appreciate is that taking on a loan in this situation only increases the pressure on a business: its focus then has to be on repaying bankers rather than supporting staff, and it is supporting staff that has to be the highest priority now.
In other words, everything is wrong about offering loans now. They do not meet the businesses needs. In many cases businesses will not qualify for them. And even if they do, this creates a perverse incentive to ignore the needs of staff at the precise moment when that has to be the priority.
So why has Sunak gone down this route when it is so obviously wrong? There is one very simple, and obvious explanation. What he is very obviously seeking to do is keep this business support package off the government's spending account, and instead is seeking to describe it as a loan, which the means that he can put it on its balance sheet. As a result he can pretend that the deficit is not going to be impacted by coronavirus, which no doubt this Tory government is desperate to do so that it cannot be compared with Labour in 2008. But for this, petty and deeply misguided political reason he is failing to supply the package that UK business needs at this moment. This is utterly unacceptable at this point of time and the cost to the country, to businesses and especially those businesses that fail, and to those whose livelihoods depend upon them, will be enormous.
It is very hard to imagine a Chancellor who has ever so dismally failed to rise to the challenge with which they have been presented. Sunak managed to be that failure today.
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More vague promises dressed up as decisive resolute action. This is a situation which requires money be provided the the general public, rapidly, and with as little friction as possible.
Knew this would happen. The only area getting free money is the most unproductive part of the economy – the city.
They are desperate to maintain the belief amongst the general public that money is so rare and precious commodity, and anything like helicopter money for the masses would shatter that illusion.
I read – don’t know if it is true, but wouldn’t surprise me – that loans have to be 20% personally guaranteed by directors. So even if you thought you’d take one, with such minute to minute uncertainty, why would you think that if it goes wrong, losing your house as well as your job is such a great idea?
We have the lunatics running the asylum.
They have literally no idea.
If that is the case this is ludicrous….
The Government guarantee is 80% of the loans, so yes, directors will presumably be asked to cover the remaining 20%. Can’t see the banks taking the 20% hit
In which case my point is made even more strongly
No, the guarantee is to the bank as lender NOT the borrower – https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils/for-businesses-and-advisors/
“As with any other commercial transaction, the borrower is always 100% liable for repayment of the facility supported by CBILS”
Precisely….so the take up will be tiny…..
I have not run a business or got a degree in economics but when I heard earlier Sunak was proposing loans, I said ( to my dog when walking him ) why it would not work for the main reason you give here.
Sunak has a PPE, an MBA and worked for Goldman Sachs!
Are we to assume Sunak doesn’t know what he doing?
Or that he does but will protect vested interests ahead of he rest of us, hoping the docile media will not expose him.
Or that his training has conditioned him to reject all alternatives , much as the bankers of 1931 did?
At the end of the film ‘Sink the Bismarck’, Kenneth Moore emerges from the underground war rooms and stops two passing sailors.
‘What’s the time?’
Seven thirty, Sir,’
‘am or pm?’
‘am Sir.’
As Moore walks away with the Wren officer, one sailor turns to the other and says, ‘Don’t it fill you with confidence when the people running the Navy don’t know whether it’s morning or evening?’
I feel a bit like that sailor.
PPE and an MBA teaches you nothing about this
Or business, come to that
Loans – ridiculous, absolutely bloody ridiculous……………………
Bahrain going further than Sunak (according to Guardian coronavirus live thread), almost 30% of GDP is quite something:
“”Bahrain has pledged a package that amounts to 29.6% of it’s GDP, which is focused on getting business owners and citizens through the next three months.”
“The government has announced an $11.44bn (£9.29bn, 4.3 billion BHD) infusion that from April guarantees private sector salaries, pays citizens’ utilities bills and exempts business from a wide range of fees. The package also offers loan support and debt relief. The announcement made on Tuesday night did not say how the package would be funded.”
I think we all know how the package will be funded (MMT!).
Indeed…
There will be loan relief further down the line, that just didn’t want to say it outright. We wait for more measures to support the household.
Then it’s the wrong measure, badly announced, and I am not convinced you are right re loans anyway
Government will absolutely not be seen to bankrupt a business. If a business fails it will be on the covenants on other debt. Why not just provide a state handouts? One presumes some form of moral hazard. Maybe the thought process is that the money will be used wisely if there is some pretence of having to pay it back. Maybe the payback will be based on profitability further down the line via accounts posted to HMRC. We wait for the detail but the interest rate will be peppercorn and eventually these will look more like student loans than conventional.
I have to admit I find your logic quite hard to follow
Everything has to be complicated and slow so that the image of a government in charge is maintained. Coronavirus + Brexit + Johnson = Chaos ( Completely Hopeless At Organising Survival).
You are right Richard. As an accountant I will have to be very careful in advising my clients about this scheme. Advising clients to borrow money in order to fund an ongoing loss is dangerous. If a forecast is required what assumption are we supposed to make about when trade will start to pick up again – 6,12,18 months or some time never ?
Thanks
Looks like you are back in the saddle Richard. Feeling better I hope?
Your comments on yesterday’s announcements are, of course, spot on.
As an accountant myself I could not recommend a loan in a situation where a business is making losses and close to insolvency.
Grants would have been the order of the day and QE to finance it. Such a shame that we are still saddled with this ridiculous “housekeep” mentality.
Don’t give up Richard. Someday the scales may fall from their eyes.
No, I still feel far from par
But I am also angry with the incompetence of this government
Back to bed now…
Genuine question: how does the all this compare internationally?
Seems to me that many European countries will increase unemployment benefits. France also seems to postpone cuts to pensions. Denmark is reported to guarantee up to 75% of salaries. Germany wants to support shorter working hours. The US is reported be thinking about sending actual cheques to (some) people.
Other countries have it right – or much closer to right
We are wildly in the worng
[…] I noted on this blog yesterday, Rishi Sunak’s suggestion that £330 billion of loan funds might be made available to struggling […]
Chaos looms ahead seems to be the nub of what you’re saying…
(I make no pretence of fully understanding the ins/outs of all this; I just enjoy your blogs & I ‘think’ I’m getting better about understanding..!)
Take care of yourself…..
I am also saying we can mitigate that chaos…
Another example of entitled tory thinking – “we can borrow more money so why cant you”and even if you can borrow money, it’ll bolster the banks bottom line when its repaid ( especially if the company goes bust and the banks are secure creditors) A combination of loan sharkism,& entitled thinking. These firms need a help up, not a shove over the edge.
No mention of the various entertainment venues that are run as charities. I wonder how many will survive?
You’re one hell of a critical thinker who is leading thought, not catching up like me. I guess that the difference to the PLP, they’re too slow and polite – Neil, Kuennsberg et al have whipped them to timidity.
[…] revenues and commercial viability, businesses will be hesitant to take on more debt, and some may not even be able to lawfully do so. For those that do make use of the new measures, this will hardly stem the long-run pressure to […]
The points You make about the small business grant are what I’ve been muttering to myself all day. If, as Nicola Sturgeon says, schools will remain closed till after the summer holidays, I will lose almost half my income, through teaching and a small amount of rent. I need to know if I’m eligible, how I apply and how soon the grant would be paid. Fortunately I’ve got savings but there won’t be much left by September.
My son in law made the same point about not wanting to be saddled with a debt when he has no income. And the rationale behind the loans schemes, if true, is despicable.
If you’re teaching right now it’s safe to say you don’t as far as I am aware
I’m a full time self employed music teacher. As pupils come to my house, I agreed with fellow such teachers in the area to finish term two weeks early, before the government’s advice was issued. As I said before, I’ll lose a huge amount of income.
I’ve now checked the gov info on the business grants and in order to receive them you have to receive either Small Business Rate Relief or Rural Rate Relief, which I don’t. As a self employed person the only compensation I may get it £73 a week ESA, though until the gov change the rules I’m not entitled to that either.
As with their blithe prediction that GCSE/A level candidates will get the grades they need, without having worked out a means to achieving this, relief for businesses also seems to be rushing through on a wing and a prayer.
Millions of self-employed will be in your situation
Unless the government acts soon there is going to be massive unemployment…
Would you support Universal Basic Income?
Not for good
I do not think our society is close to accepting the massive tax implications if it was going to be worth doing
Temporarily, maybe