Rishi Sunak last week called his £12bn package to buttress the economy amid the spread of coronavirus “temporary, timely and targeted”. He was applauded – for a day. The measures, which included £5bn for the NHS, quickly looked peashooter-sized when, in the current jargon of financial markets, a big bazooka was required. The chancellor’s headline policy definitely qualifies as big – £330bn of loans and loan guarantees for business hit by the coronavirus is equivalent to 15% of GDP. The UK has never seen anything like it, even if similar policies are already being launched across Europe. Some of last week’s budget measures were also scaled up. Business rates have been scrapped for a year for a large swathe of the economy, covering retailers, pubs, clubs, theatres and restaurants. Cash grants of up to £25,000 for small and medium-sized businesses in affected sectors have also been boosted. Sunak called it a £20bn handout, on top of the budget moves. Householders also get a three-month mortgage holiday if required.
Is it enough? Almost certainly not. Last week’s experience shows that the definition of “whatever it takes” shifts by the day. And Sunak, to be fair, hinted at more to come in coming days – specifically for airlines and airports and generally for employees and individuals. The latter may be the crucial part in establishing a sense of medium-term confidence in the economy. The US is publicly contemplating sending $1,000 cheques to millions of Americans, a policy that is close to being “helicopter money”. Sunak did not deny the UK could do the same. The technical work, one can assume, is being done in the Treasury. The £330bn loan package can also be viewed another way – as merely a large sticking-plaster. Loans can alleviate cashflow crises where companies are confident demand will return, but a loan is not a handout. Some employers may decide it’s better for them to shed staff or shut up shop, the behaviour Sunak is trying to discourage. The threat of mass redundancies looks large, with effects that could last years. The next logical step – highly expensive for the public purse – would be for the government to underwrite a chunk of companies’ payroll costs, an approach that has already been adopted by some Scandinavian countries and France. Supporting half of Britain’s wage bill would cost the government approximately £40bn a month, according to estimates by Close Brothers Asset Management, a funding firm. “This is the sort of protection that might be required to ensure that when we come out the other side, consumer demand returns to pre-crisis levels and the economy isn’t damaged beyond repair,” said Robert Alster, the group’s investment chief.
Adding £40bn a month to government spending would clearly bust current deficit projections but the deficit is not the worry. Bond markets show no alarm at the prospect of governments writing large cheques. The yield of 10-year UK government IOUs is just 0.5%. Indeed, a backlash from the bond market is more likely to occur if the government is judged to be spending too little to protect the economy, not too much. Economic orthodoxies, in other words, are being overturned, and we should not be surprised. A global recession is now almost certain to happen in 2020 and some economists are talking a potential hit to economy in the April to June quarter, covering the predicted peak of the virus, of 15%. Again, that is unheard of during peacetime. So the outpouring of war-like “whatever it takes” rhetoric is legitimate. The initial reaction from business groups was favourable, but don’t read too much into that. These policies were “first steps”, said Sunak, and they are usually the easiest to take.