As an avid Star Wars fan, Rishi Sunak will be familiar with the resourcefulness and guile of Han Solo as he escapes many tight spots and tricky scenarios through the films.
Likewise, the British economy is up against it and peering over the crumbling precipice, looking down into the abyss of coronavirus. Just as Captain Solo navigates the Millennium Falcon through moments of danger throughout the galaxy, the Chancellor will want to keep a steady hand at the Treasury to steer the country to a calmer period.
In the meantime, the British state has stepped in to pay people’s wages through this period – effectively nationalising the economy and underwriting the private sector.
This is the largest bailout of private enterprise since the collapse of Lehman Brothers, and Sunak faces some of the same tricky issues policymakers faced then: which companies should receive help? What losses should the Government inflict on private shareholders who had been receiving dividends? How will the Government get the money back for the taxpayer?
After a decade of broadly favourable economic conditions, too many profitable firms have gone into this crisis with poor finances and are now queuing up outside the Treasury cap in hand.
The airlines and utilities in particular have paid billions in dividends and stacked their balance sheets with debt.
On average, around half of EasyJet’s pre-tax income has been allocated to dividends since 2015. The holding companies owning Heathrow, Gatwick and Manchester airports have regularly paid dividends in excess of 100% of their income. Several companies in the UK aviation industry are also paying very low effective tax rates (Wizz Air, for instance, pays around 3.5%). The public will take a very dim view of businesses, including Richard Branson’s Virgin Atlantic, who have borrowed too heavily and doled out vast pay packets to executives and are now pleading poverty with the government.
To write these companies cheques signed by the taxpayer, no questions asked, will encourage and enable more reckless moral hazard attitudes and ‘too big to fail’ behaviour.
Renters and the self-employed especially keep a rainy-day emergency fund of savings so they can pay the bills if the unexpected happens. They may well question why these large companies have not been as responsible, even if the current circumstances are pretty extraordinary.
But it would also be wrong to tar all companies with the same brush. Bank of England Governor Andrew Bailey has said he expects financial institutions to make protecting customers a priority, and the UK’s five largest banks have responded by suspending payment of £7.5 billion in dividends over the next two months. Insurance companies have scrapped pay-outs of around £1.3bn, and in total UK-listed companies have suspended or cancelled dividends worth over £28bn.
In this light, Tesco’s decision to pay out over £635m to their shareholders looks difficult to defend, especially since the company has benefited hugely from the Government’s business rates bailout.
Tesco’s case is a sharp reminder that there must be reciprocity of the largesse Sunak has shown towards UK PLC.
That does not necessarily mean the Government taking equity in certain firms – whatever the siren calls from some on the left. As we discovered in 2008, the state taking a stake in firms can create big risks for taxpayers. Just look at RBS: when it was bailed out the expectation was that taxpayers’ 84% holding would be sold off in a few years. More than a decade later, the Government still owns over 60% of the bank, underlining just how hard it can be to get back money injected during a moment of crisis.
A better alternative in the current crisis would be to issue convertible debt loans, rather than injecting fresh equity. These are loans which can be exchanged for shares in the company, subject to them ensuring taxpayers’ money is protected as far as possible.
But Sunak should go further in requiring action from them in a number of areas. At a minimum, any support should be conditional on it saving and supporting jobs. Corporate governance and compliance with environmental, social and governance criteria could be firmed up.
In the same way the conventional tobacco industry is leading the innovation of safer electronic cigarettes, the Government should secure firm pledges and clear plans for companies to reduce their emissions in line with international environmental standards. This could involve investments or partnerships in low carbon infrastructure like electric vehicles, improved railways and better cycling facilities.
To demonstrate their continuing commitment to blue collar workers in the Red Wall and around the country, the Government might ask for strengthened workers’ rights, better conditions and above all better support for retraining and reskilling older employees – particularly in industries where there is a risk of automation or industrial decline.
Tax arrangements could be reviewed extensively with HMRC to ensure firms are are not aggressively avoiding, or illegally evading their liabilities. Above all, the companies must be incentivised, or required to invest properly for the long term and have a cash, rather than a debt, buffer for inevitable turbulence beyond this crisis.
Of course, these kind of requirements need not apply to most responsible companies, who are showing just how valuable the private sector is at a time like this.
Take pharmaceutical giants AstraZeneca and GSK, who are opening a Covid-19 testing facility at the University of Cambridge. In Yorkshire, Burberry are manufacturing hospital gowns and masks for medical staff and patients. Rolls-Royce and McLaren are creating visors, while INEOS and Diageo are producing hand sanitiser.
We will need to see that same readiness to help once the worst of the crisis has passed, given the severity of its economic impact. Indeed, ministers are privately shocked at the economic damage already caused by the lockdown – the latest forecasts showing that GDP may have fallen 25% by the summer.
In the early phase of the pandemic, Sunak acted powerfully and promptly, steadying the markets successfully – when they initially struggled to price the uncertain impact of COVID, and the stimulus response.
The same kind of swift, robust action will be necessary for reframing the role of business in wider society, as the government tries to reset and reboot the economy after this maelstrom passes.
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