A second lockdown demands decisions

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I wrote this post for the Class think tank, yesterday:

The start of a new period of lockdown across much of the UK requires a moment of serious reflection. Much of this will focus on the medical necessity for this action. Others will want to consider the social consequences. The scale of concern about Christmas is an indication of that. However, I am primarily interested in the economics of this lockdown.

We already know 2020 has been a disastrous year for many in the UK. Millions have already lost their jobs. Government support schemes have helped some, undoubtedly. However, many have been left outside them, and some of the most vulnerable people in society have been hit hard by a cruel loss of income for reasons entirely beyond their control. Data now shows that the young, those from BAME communities, and those on low pay or with insecure employments have suffered the most. Inequality has risen in 2020 as a consequence.

A second national lockdown in England, with broadly similar measures in the other countries of the UK, is likely to exacerbate this trend. At the same time, with little or no apparent new support being made available to small employers, in particular, this problem is likely to be exacerbated.

That is because the duration of this lockdown is unknown, despite the prime minister's announcement that it will be reviewed on 2nd December, and because the coming weeks are usually the most profitable of the year for many businesses in the retail and hospitality sectors. The pre-Christmas period generates the income that keeps these businesses going for the lean months of winter and early spring that follow. That revenue is now going to be lost, and as a consequence, many businesses are going to face very serious risks of failure.

This means that in my view the government now has a very important decision to make. It has to decide in whose interests the economy of the UK is being run. The choice to be made can be fairly simply summarised. As the economic crisis that we face deepens the government has to decide whether it has a bias towards labour, and the companies that employ people, or capital. In this context I view capital as banks and other suppliers of finance plus landlords and other renters of property, which might also include business equipment on hire contracts including cars.

A simple example might explain the problem that has to be faced. Assume that a business making steady sales of £200,000 a month has its sales income halved by coronavirus. Assume too that for every pound of sales income the business earns it pays out 40 pence in employment costs and 30p in materials costs. Then assume that it has £50,000 of monthly overheads to pay, including rent, insurance, bank interest, vehicle leasing costs, and so on. On its normal level of sales the business makes £60,000 a month before its overhead costs and makes a profit of £10,000 after them. Now let’s assume that even it can furlough people its labour costs increase to 45p per pound of sales during lockdown, because employers still have to contribute to their employees' pay in the furlough scheme, and overheads can only be cut a little, to £45,000 month. The business now generates only £25,000 from its sales income after direct costs to cover overheads and it loses, after overheads £20,000 a month.

Few smaller businesses in the UK can afford to suffer losses of this amount on a regular, and recurring basis. It is beyond their means. And given that vast numbers of UK businesses in the UK will now be facing this situation large-scale business failures are now likely, with large job losses to follow, whether or not the furlough scheme works.

What that means is that either business need bailouts to keep their landlords and bankers earning the income that they are accustomed to enjoying, or instead the government has to decide that the hard times that have fallen on so many employees, and most especially the low paid are something in which they must share.

This is possible. For example, the government could simply decide that by law and bank loans and finance leases could automatically be extended by six months now if the person making payment wanted that to happen. The interest on the loan would still be due, but it would be added to the further payments and be paid off over the remaining life of the loan. Businesses would then get immediate and automatic cash flow relief, and banks would still be earning, even if their cash flow suffered. The business gets a cash flow break. Banks do not suffer bad debt. Both win in that case.

And rent cuts for all businesses in the most impacted sectors could be imposed by law. I think reductions of at least 50% would be appropriate. Those landlords with mortgages should be allowed to apply for an automatic loan extension as noted above. The rest should be required to take the loss. After all, they will still own the property after this crisis when many employees will have no idea if they will have a job. And keeping tenants in properties is vital for landlords. If businesses begin to fail so too will the landlord’s chance of letting again so a controlled reduction in rents for a limited period is also in landlord’s interests, however much they will protest.

The simple fact is though that the bias of support in the economic crisis to come has to be towards jobs. Without that, even capital will have a torrid time. With it, there is a hope that we’ll recover more quickly. This is not rocket science. It is straightforward economic common sense. But has the government the ability to see that and act soon, as is so obviously necessary?