The chancellor’s emergency measures for the coronavirus economy were targeted almost exclusively at small and medium-sized businesses, or SMEs, the sector where a short-term cashflow crisis can quickly become terminal. For big business, Rishi Sunak offered fewer handouts. The Bank of England, it seems, has been handed the job of protecting them from the global storm.
As an exercise in minimising economic damage, the thinking makes sense. The government cannot restore a supply chain that requires goods to arrive from China or northern Italy, but it can help pubs, clubs, restaurants and retailers on deserted UK high streets.
A survey last week from the Institute of Directors, whose membership is 70% SMEs, underlined the worry. One in five firms ranked the threat to their organisation from the coronavirus as “high” or ‘“severe”. A further 43% said there was a “moderate” threat.
Thus, Sunak seems to be trying to give struggling SMEs a cash buffer by removing, in effect, a chunk of their fixed overheads. Business rates for companies in the retail, leisure and hospitality sectors with a rateable value of £51,000 will be abolished for a year. This measure was “over and above what we expected”, said the IoD’s chief economist, Tej Parikh.
Very small companies that don’t pay business rates – because the rateable value of their properties is below the threshold – will get their own handout in the form of £3,000 cash grant, a £2bn giveaway that will benefit 700,000 business, said the Treasury. The accountants EY called that move “unprecedented”. Meanwhile, pubs will get their own boost with their business rate discount raised from £1,000 to £5,000.
The main virus-related assistance for SMEs was less of a surprise – the government will refund the cost of statutory sick pay for up to 14 days, including for those who self-isolate, at a cost of £2bn.
Will it be enough? That depends primarily on the size and duration of the downturn. The chancellor can breezily pledge to give the NHS “whatever it needs, whatever it costs”, but it would be impossible to make the same promise to SMEs or business in general. Sunak seems to be thinking in terms of quarters – a sharp downturn immediately, followed by a recovery.
Another critical factor will be how quickly the bureaucracy moves. A looser approach by HMRC on granting “time to pay” pleas will only be effective if companies receive a prompt answer.
“My experience of working on government support for small business and bank lending during the 2008 financial crash is that, while today’s announcements may look good, the key question will now be how quickly these can be implemented and feed through to the economy,” said Adam Johnson of Grant Thornton.
The good news, at least compared with 2008, is that the banking system looks solid. The Bank of England’s exercise in shock and awe – an interest rate cut, a funding scheme for SMEs and a relaxation of banks’ capital buffers to allow more lending – was accompanied by an impressive boast. The banks, said the governor, Mark Carney, are capable of lending in aggregate a sum equivalent to 13 times their net loans last year. The financial capacity to dampen the economic blow exists.
The trickier part will be getting credit to the right places when the squeeze is on. We are currently at the stage where banks proclaim their willingness to perform their patriotic duty of helping borrowers in distress.
Those good intentions will only be truly tested when, or if, the economic bite becomes severe. We’re not there yet, and the main economic moral from Sunak’s budget was this: the government thinks the disruption could become nasty very soon.