28 May 2020

Project Birch must not be a magic money tree, nor an olive branch to losers

By John Macdonald

Project Birch, the Government’s latest Covid-induced bailout scheme, is designed to rescue firms whose failure would cause “disproportionate harm” to the economy. But unless the Treasury is extremely clear about its bailout criteria and even clearer about how it intends to pay for them, then the project itself poses a disproportionate threat to the economy.

At the moment, the package is reserved for “viable companies which have exhausted all options”, including government loans.

It is important to bear in mind that many of the firms said to be in the frame for support are large conglomerates that were in trouble long before the pandemic. Household names like Tata Steel, Virgin Atlantic and Rolls Royce are all said to be lobbying for bailouts, positioning themselves as too big to fail. They expect a system of political patronage to persist when normal trading resumes. Bespoke bailouts, grants and preferential loans will be sought by companies with large PR budgets and lobbying links to their local MPs or old colleagues in the Lords.

While much of what the Chancellor has announced thus far has been justifiably unprecedented, it is important not to understate the sheer scale and cost of such a project. Virgin Atlantic’s search for a £500M taxpayer funded bailout was enormous when discussed purely within the context of the aviation sector – with the likes of Tata Steel reportedly seeking the same amount, and each industry limbering up to see how much it can get from the taxpayer, the costs look positively gargantuan.

Virgin Atlantic has been lobbying hard for a bailout since early this year, claiming it is the lynchpin of a competitive airline industry. You might recall this is quite similar to the claims BA made in recent years – claims that Virgin Atlantic rejected as anti-competitive. One rule for thee and another for me.

So many companies are suddenly finding that they’re very patriotic and integrally British as the country clings to the flag and governments across the world revert to mercantilist policies designed to maximise revenue generation, rather than let citizens generate value for themselves.

You’d think we see through it, but time after time it’s trotted out through the media. Time after time politicians step in with cheques from us to pay the bills others have racked up.

The stark reality is that the pandemic is not just an unforeseen circumstance that poses a momentary threat to these businesses. That was why the taxpayer stumped up at first to ensure companies didn’t go bust that would otherwise survive. But time hasn’t stopped and it’s people that matter in an economy, and their preferences. That means if consumer habits change, businesses have to adapt and, in some cases, go under. It is entirely possible, for instance, that in the coming years we will need fewer commercial airlines.

Virtually all companies, large or small, are struggling as they watch their debts pile up and see their revenue-raising capabilities substantially diminished. As restrictions are eased, some industries will be able to raise money and state support should fall away. But some companies and even some industries, will not be viable. When you’re poorer the need to find out what is a sound investment and what isn’t is all the more important.

Big businesses and trade unions that can mount powerful PR campaigns and effectively lobby politicians distort that profit-seeking process. Smaller companies and new competitors don’t always have the ear of the powerful. It is the Government’s job to create level playing fields of competition, not choose the winner from the outset.

This masks those who are really put at risk by the pandemic: people, not businesses. Thus far, the Government has been successful in avoiding the lure of preferential treatment for certain businesses. But as pressure from their lobbyists mount, it should remember that the extraordinary measures it has taken thus far have been to protect livelihoods, not particular companies.

This presents ministers with the unenviable task of accepting failure, which will be made even more unpalatable by an avalanche of special pleading. Big names will claim their failure is not their own, but belongs to special circumstances outside their control, and that they need special treatment given their special place in the British economy.

This is not to suggest the Treasury should simply sit on its hands as these firms struggle, but its focus should be on building a competitive, even playing field for businesses to compete on.

Making it easier to invest would help do that without favouring one company over another. We estimate that if you abolish the Factory Tax by allowing manufacturers, large and small, to immediately write off capital expenditures, investment would be boosted by 8.1% and labour productivity increased by 3.54%.

The Government could also introduce a temporary Coronavirus Insolvency Limited Liability Forgiveness Scheme. This could work by offering limited debt forgiveness to companies that are effectively bankrupt, can demonstrate a substantial (between 50-75%) drop in revenue due to coronavirus, and display viability through cash and cash equivalents ratio to short-term liabilities.

While far from ideal, this aims to protect the productive capacity of the economy by allowing firms to continue to operate, rather than propping up businesses that no longer produce goods and services people want.

It is one thing to take extraordinary measures to protect peoples’ livelihoods and support viable businesses. It is entirely another to offer an olive branch to bail out losers. The Government must choose the former. In the long run, both the British economy and taxpayers will thank them for it.

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John Macdonald is Head of Government Affairs at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.