The UK’s SMEs breathed a sigh of relief, the banks systems were overwhelmed and delays in delivering cash ran to weeks. By the beginning of the 21st of June a billion pounds had been lent under BBLs, highlighting the banks reluctance to lend under CBILS, with just over 10 billion approved by them under that scheme.
On the 14th of May the OBR forecast that the cost to Government of combatting the coronavirus pandemic has risen to £123.2bn, with annual borrowing estimated to be 15.2% of the UK economy. This figure is the highest annual borrowing since the end of World War II when it stood at 22.1%.
By the end of April the Chancellor had drawn most of his financial ammunition to the front line, providing levels of financial support seemingly undreamed of on the 11th of March. One of the biggest gambles in British Financial History was underway, would a Y shaped recovery ride to the rescue in time to allow the economy to recover from what would be the biggest drop in GDP for 300 years?
Today as we enter Autumn, that remains to be seen. There have been minor tweaks since May, the allowance of flexible furlough for part time working until the end of October, a £1000 jobs retention bonus for employers at the end of January 2021, time to pay Vat and Taxes, and a second grant for the self-employed in October trimmed to £6,570.
The successor to the Furlough scheme, the Jobs Support Scheme will run from the 1st of November for six months, however it is significantly less generous with the Government’s contribution limited to just £697.92 per month.
The Chancellor’s financial ammunition boxes are starting to look a little bare. Indeed the Autumn Budget is cancelled, and the virus is making a comeback. Hopefully it will be that ‘difficult second album’ for Covid-19 and it will peter out quietly.
What Sunak sought to achieve in the first six months of the Covid crisis was preserving the economic engines of the economy, not just the production capacity but the spending capacity too. In a consumption led economy consumers are king, the 9.4 million people who were furloughed and the 1.17 million small businesses which relied on bounce back loans have been the key element of Sunak’s strategy.
At lockdown Boris Johnson spoke about the refiring up of the ‘great engines of the British Economy’ after the lockdown, and early data shows that happening, however it was also hinted that a vaccine might be ready by September, as lockdown eased from the 28th of May it was clear that the financial strategy at least was based on a single wave of the Pandemic.
Today, at the notional half time break in the Covid game, assuming a vaccine turns up in the spring we face a second wave, millions around the UK are caught in rolling lockdowns, restrictions similar to early March affect us all and infections are on the rise, what now for the Chancellor?
It will soon become clear how employers will decide to manage their workforce capacity. Will they subsidise short time working for six months to retain surplus staff, or cut ties with a redundancy package and recruit back when more certain trading conditions return? When the BBLS and CBILS capital borrowed has been exhausted will owners double down? Will they be able to?
One issue emerging for smaller businesses is that the rule that a business cannot hold a BBLs and CBILS loan at the same time means that their bounce back loan must be replaced by much more expensive and partial recourse lending before further working capital can be accessed. This is one of the cliff edges Sunak needs to address quickly, although the Banks are probably happy with that cliff edge as it creates a significant margin increase opportunity for them.
The difficult facts at this point in the crisis are that Sunak has fired all his guns in a ‘shock and awe’ gamble on a single wave and a ‘V’ shaped recovery. His options for the coming cycle are considerably reduced, as are his counterparts in all the world’s major economies. Instead of spending our way out of problem as for the first phase, it has to be a concern that the options now available mainly involve the fair distribution of economic pain.
The challenge is predicting what will happen, and almost everyone has been wrongfooted so far, for example with the surge in the property market from June. It is not just unprecedented, but entirely unpredictable.
Over the coming period IFA Magazine will focus on the strategies IFA’s and wealth managers are recommending to clients to preserve and enhance their wealth. Join us for that discussion.
Next Month: We examine the unintended consequences of the financial response to date and review further developments.
