As Coronavirus cases pick up in the UK, policymakers have been seeking an antidote for the potential economic fallout of the pandemic.
The official line has – rightly – been that all options should remain on the table. But what are these options, and how could they help the businesses at the coalface if the situation escalates?
For small businesses, cashflow is paramount. Even firms with profitable operating models may lack the funds to go through an unexpected dry spell. Unfortunately, supply chain disruptions, a potential decline in domestic demand, and wider uncertainty could combine with lost production from quarantined workers to put real strain on companies’ margins in the months ahead.
One of the first priorities for government might therefore be to provide extraordinary support for the inevitable stresses firms would face from falling revenues. Initially, this could be done by extending HMRC’s Time to Pay scheme, employed during the 2008 financial crisis, to enable companies under financial distress to spread their tax payments over a longer timetable. Firms would welcome greater leniency around making their regular VAT, PAYE and corporation tax payments, particularly regarding penalties for missed deadlines. A ‘hardship fund’ for the self-employed and other gig economy workers, not covered by SSP, to access bridging support is also worth exploring.
For some firms, easing compliance-related burdens may not be enough, and there could be a case for government to support wider access to finance if things worsen. Programmes like the British Business Bank’s Enterprise Finance Guarantee, through which the government provides a part guarantee for company loans, could help firms in this regard if banks get tetchy around extending credit. (France is already taking similar steps through BPI France.) Beefing up the BBB directly to lift financing to SMEs might also be an option to get funding to businesses more rapidly.
Efforts to help those feeling the pinch don’t just have to come from Government: private actors could also take action. Banks, for instance, could show forbearance. Insurers could be encouraged to pay claims quickly, while larger firms might similarly look to fast-track payments to SMEs.
At some stage the focus would shift to speeding up the post-outbreak recovery, which makes the Budget next week even more significant. The Chancellor could make temporary overtures to ease business costs and entice investments, raising the employment allowance above the proposed £4,000 mark to lower national insurance costs, alongside further cuts to business rates and additional investment reliefs to help firms make up for lost ground later in the year. Indeed, the Italian government is already looking at introducing tax credits for companies reporting a 25% drop in revenues. In a severe scenario, direct support or subsidies could be offered to the most impacted sectors.
Monetary policy will also have a role to play. After the Federal Reserve opted for an emergency cut to US interest rates, calls for the Bank of England to do likewise have grown louder, and many expect the Monetary Policy Committee to follow the Fed’s lead at – or possibly even before – its next meeting on March 26. In reality, lowering the cost of credit will do little to directly stimulate the economy now; it acts with a lag, and households will still be unlikely to hit the high streets if they fear infection. Nonetheless, a cut could provide a crucial prop to keep equity markets buoyant.
Less orthodox forms of monetary policy provide another possible route forward. If Europe and US fail to contain the outbreak, and cases begin to rise again in China, short-term money markets may get spooked, just as they did at the outset of the financial crisis. In this scenario the Bank could explore liquidity support operations, allowing commercial banks to meet temporary shortages.
Ultimately, the Bank’s ability to support lending directly may be most needed. When it cut interest rates following the Brexit referendum, the Bank of England also used the Term Funding Scheme, which allowed banks and building societies to borrow funds on the cheap so they could pass on lower rates on their own loans to households and businesses. This could help reduce the burden on the government in its attempts to provide finance to struggling firms should things get that far.
All told, policymakers have a significant arsenal at their disposal. With the potential for the virus to escalate swiftly, the key will be in deploying it with equal agility.
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