Budgeting for a crisis

Budgeting for a crisis

It used to be that after a Budget the days and papers would be full of analysis and reactions and, often, the discovery of nasty surprises or other changes backfiring on the government. (Remember Osborne’s “pasty tax” or Hammond’s NI surprise?) Not this year, obviously. The measures introduced in the Budget to help deal with the economic consequences of the coronavirus, however welcome, now seem too little for the scale of the task. In summary (the details are here – in sections 1.31 and 1.32) there is (1) extra funding for the NHS and public services; (2) extending Statutory Sick Pay for those advised to self-isolate; (3) welfare support for those who cannot claim SSP and a hardship fund; (4) support for businesses experiencing increased costs or cash flow disruptions via Business Rates relief (which will help SMEs in the South rather more than in the North), a Business Interruption Loan scheme of up to £1 billion, a £2.2 billion grant scheme for small businesses and a helpline re tax. 

The issue with individuals is the imbalance between the risks: the risk of catching a virus which will likely not cause those under 70 much harm (so far as we know, for now) vs the immediate consequences of having no or reduced income and becoming unemployed. SSP is not an income; nor is a hardship fund. These proposals do not help the employed now facing the very real risk of unemployment nor the self-employed, particularly those in the “gig” economy, those most likely to come into contact with lots of people. If work is relatively precarious, people not at high risk are more likely to prioritise maintaining income than self-isolating and getting into debt or losing a job. It is not really clear whether the government wants workers to carry on working, get the virus and help develop herd immunity or avoid spreading it by staying home once infected. 

Whatever the policy which changes or develops daily, If the latter, it is time to provide a 100% replacement income for all workers. Or at a minimum for all those who will necessarily be in contact with people in high risk categories: care workers, delivery people, health professionals of all types etc.

What of businesses?  The Budget’s proposals assume that most will continue operating, even if they face temporary drops in income. The PM has just undermined that assumption with his remarks to avoid pubs, bars, restaurants and theatres. Doing so without coming up with a support package is irresponsible and unforgivable. It is an abdication of responsibility which passes the risk of government advice to individual businesses who are least able to bear those risks and which also makes it impossible for them to claim on any insurance they may have. Badly done, Boris. Badly done indeed.

And in any case, how secure is such an assumption?  Italy and Spain have closed all but essential businesses. Belgium and France have closed all restaurants and bars. Pubs have been asked to close in Ireland – just in time for St Patrick’s Day. 

What happens if such measures are taken here? Take one example. The hospitality sector in the UK employs about 3.2 million people, circa 9% of the workforce (many of them young). It is worth about £130 billion annually and generates ca. £39 billion in tax revenue. It is also located pretty much everywhere in the country and is particularly important in certain regions (Devon and Cornwall, the Lake District, Scotland, for instance). 

What would a French-style closure – of all non-essential shops – mean? Let’s be blunt – without government help, very many currently viable and profitable businesses will close. People will lose their jobs. It isn’t just demand that will collapse. Support for such a policy – especially if it lasts for months – will also collapse. Alternative employment is unlikely to be available. Within 20 minutes drive of where I have written this there are at least 30 venues which would likely be closed by such a ban. Or even advice to avoid them. (Full transparency: one of those is my daughter’s – a pub, restaurant, take-away and music venue. It is profitable and employs 4 people.) 

Such places will likely never reopen if the latest policy advice lasts for months, as must be quite likely. Plus the months from Easter to autumn season are the most profitable for the hospitality sector, when the fat is earned to keep venues going during the leaner winter months. This virus could not have come at a worse time for such businesses.

Repeat this for other sectors affected by an Italian-style shutdown. This may well be essential when lives are at risk, to prevent a collapse of NHS services. We all need to breathe; we don’t all need a drink or a meal out with friends or to buy stuff when lives are at risk. But eventually some form of normal life has to resume (however changed it may be) and our economy needs to be prepared.

Remember: we also face another significant economic change (maybe even a shock) at the end of the year. Little chance of unleashing any potential with increased unemployment, debt, home repossessions, closed businesses, especially if there is a second bout of the virus.

Is there any way for businesses to mitigate such risks? Short- term closures may be survivable. But the short-term has a habit of lasting longer than anyone expects or hopes. 

Business interruption insurance is one such measure. How useful it will be depends on how the government implements such measures and what compensation or support it provides? Insurance premiums for the hospitality sector have already risen. Insurance companies will not provide cover for a closure mandated by government, absent the arrival of the disease on specific premises (and even there the wording matters). They certainly won’t provide cover on the basis of the PM’s “advice”. This is one case where the government should work with the insurance industry to provide cover, a backstop, to allow such businesses to keep going so that they can reopen when these measures are no longer needed.

But much much more is needed – if economic life has to be shut down or severely curtailed then the state has to step in. Something similar to what Norway and France are doing is needed. Boris is being frivolous. Businesses do not need “space”. Nor do they need fudged statements with “advice” which allow insurers to avoid paying out. They do need support – and real money which will help them keep going or a suspension of all payments . Yes – it will be expensive. But much less so than a serious – and continuing – economic hit. 

The economic consequences of this virus are likely to be on a par with the Global Financial Crisis. Then governments bailed out banks not people (other than indirectly). Austerity for people was loudly proclaimed as the necessary policy. Now that we face a potentially similarly serious shock governments need to direct aid – and plenty of it – directly and fast to those individuals and businesses affected by their necessary health measures. Not just via loans from banks (some of whom have increased lending rates even as the BoE reduced its rate) or restructuring help (see the concerns with RBS’s GRG division for why not), not via complicated requests for grants or welfare, which may prove too little, too late. “Helicopter money”, if you will, to keep the economy going until a new normality can re-establish itself.  

People and businesses may well understand the need for drastic measures to minimise the health impact of the virus. They may well endure the temporary inconveniences of quarantines and self-isolation and all the rest of it. But they also need to feel that there is some light at the end of this tunnel, that their jobs, businesses, ability to provide for themselves will not disappear. They should not feel that the choice is between their health and being able to support themselves and their families. The state cannot simply leave this to the market or indirect measures. Yes – there are risks. Yes – it is an unprecedented extension of state intervention. But this is an unprecedented situation. So bold, imaginative and generous measures are needed. Now.


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