Seb Wallace

When future eyes look back on the Coronavirus crisis, the decisions made by Government at the time will be central in people’s minds. As the crisis grows, it is imperative that the Conservative Government maintains both the health and economic policy initiative, responding to developments in a timely and considered manner.

Health measures are being introduced prudently and cautiously. Policies of social distancing, self-isolation and quarantine are rolling out across the country. It is now time for further meaningful economic measures to support the economy.

Introducing restrictive health measures is a trade off – saving lives at the expense of the economy and jobs. While this is undoubtedly the right thing to do, the negative economic impact of these measures can and must be mitigated with simple and cost-effective economic measures.

UK national GDP is currently circa £2.2 trillion, with UK national debt equal to around 80% of GDP. After a decade of austerity measures, the UK still has a reasonable national debt/GDP ratio and, given this, a reasonable amount of room to manoeuvre to support the economy now.

In 2008, the government incurred a fiscal deficit of around 10% to fund the bailout of banks. Such a fiscal deficit now would be equal to over £200 billion of government economic stimulus. However, this is a large deficit to incur with no clear recipient.

The government should therefore introduce a “Jobs Package” of stimulus. The package could broadly look as follows:

1. The government proposes a £200bn government guarantee scheme, under which the government guarantees loans made by UK banks to UK businesses in the impacted sectors.
2. UK banks and alternative lenders originate and lead lending themselves.
3. Lenders are incentivised by margin spread, but will be prepared to lend competitively as they will be lending against sovereign risk.
4. Such lending, with its sovereign risk profile, should not count towards bank capital ratios, meaning the lending will be less restricted than typical bank lending.
5. While the announced package is worth £200bn, defaults are not likely to exceed at most 20%. This means that the cost to the Government of this package may be £40bn, spread out over the course of several years.
6. However the size of the overall package is significant, and directs support to the economy where it needs it most – businesses with unexpected cashflow needs. In turn, these new debt lines will allow businesses to choose debt over losing their employees, saving jobs.
7. To confirm the Government’s lending capacity, the government may issue around £20bn of gilts alongside announcing the government guarantee scheme.

The package is simple, and will support hard working families’ jobs while companies try to minimise the economic impact of the Coronavirus. The package itself will signal to financial markets that the Conservative Government strongly supports the economy, while doing so in an efficient and cost effective manner.

The Government currently holds the health policy initiative. It is reacting quickly and cautiously to the unfolding crisis spreading across the country. It is now important that it maintains the economic policy initiative too.