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A financial history of the COVID-19 crisis

Making financial policy on the hoof is fraught with difficulty, as Rishi Sunak has found having had to tear up his plans for the future just weeks after presenting his spring budget. A little like a car starting a speed wobble, real care needs to be taken in the corrections so as not to amplify the problem. Here we review the measures taken so far in the COVID crisis, and examine the road ahead and the adjustments that may well be needed to steady the economy.

Sunak stood up to the dispatch box at 12.34 pm on the 11th of March to deliver his first budget. Already under pressure to work quickly having been appointed Chancellor just 28 days earlier on the shock resignation of his predecessor Sajid Javid, it was a budget framed to deliver the party manifesto that had helped win the 2019 election with a majority of 80 seats.

In that budget, held against the backdrop of an 8% FTSE 100 drop two days earlier, Sunak announced COVID measures, describing them as ‘Temporary, timely and targeted’ and broadly grouped into three categories costing approximately £12 billion in total.

He awarded just £5bn for the NHS, however noting that ‘whatever extra resources our NHS needs to cope with coronavirus – it will get.’ With hindsight one wonders what they thought the pandemic would look like that afternoon.

£6bn for Tax reliefs, a budget he hoped would stretch to cover rates relief for businesses with rateable values under £50,000, Government funded SSP for 14 days, a £3000 grant for 700,000 small businesses and a COVID Business Interruption Loan Scheme (CBILS) with loans of up to £1.2m, 80% guaranteed by the Government.

And another billion for extended benefits. In retrospect, the Government seems to have had no idea just how serious the economic damage caused by COVID would be.

CBILS proved to be a damp squib, the banks didn’t like the idea as they were exposed to 20% of the losses directly and were overwhelmed by the level of applications. The net result was CBILS did not deliver as British business scrambled to shore up rapidly depleting cash reserves, retreating turnover and collapsing balance sheets.

Not even a week after his budget, the following Tuesday the 17th Sunak extended his rates relief to £20bn, sending £3.5bn to the devolved administrations. The Government’s advice to avoid pubs, clubs and theatres necessitated not just this intervention, but was ‘sufficient for businesses to claim on their insurance where they have appropriate business interruption cover for pandemics in place.’ The cash grant for the smallest 700,000 businesses was extended to £10,000.

Sometimes a Chancellor’s pronouncements are ignored by commercial interests, as with the Banks and their lack of enthusiasm for CBILS. The insurance industry dug its heels in and refused to pay out on business interruption policies ,and it would take the FCA to win a High Court action against Hiscox on the 15th of September before some businesses would see the funds that insurer owed them under their policy.

Sunak also announced that Mortgage lenders were to offer a three month payment holiday to borrowers. However, controversially Business Secretary Alok Sharma told Sky News ‘The Financial Conduct Authority has talked to banks and lenders about this issue . . . and it shouldn’t affect your credit score.’ A point the FCA confirmed on the 20th. Lenders appeared to ignore this using bank statements to weed out those who had taken mortgage holidays and declining their applications later. The FCA was forced to issue a clarification effectively conceding that Mortgage Holidays can impact future applications. Those regulated by the FCA might raise an eyebrow at how easily it batted away the poor advice it gave to consumers in March:

‘Our guidance published in June 2020 (and our previous guidance published in March 2020) makes clear to firms that they should make sure that if you take a payment holiday then it won’t have a negative impact on your credit file. However, you should remember that credit files aren’t the only source of information that lenders can use in lending decisions. Factors other than payment history may also be relevant. For example, lenders may take into account your bank account information, your use of credit products, or how much you are in debt, when
making a lending decision.’

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