27 April 2020

Rishi Sunak doubles down on his coronavirus loans – and gears up to argue for austerity

The Chancellor’s concerns over government debt are a pretty big hint about where he’ll take British fiscal policy after the crisis.

By Stephen Bush

Britain's Chancellor of the Exchequer Rishi Sunak walks to 10 Downing Street in central London on April 8, 2020, ahead of the Government's daily COVID-19 news briefing. - Britain's prime minister began a third day in intensive care battling the new coronavirus, which has struck at the heart of the British government, infected more than 55,000 people across the country and killed nearly 6,200. (Photo by Tolga AKMEN / AFP) (Photo by TOLGA AKMEN/AFP via Getty Images)

Rishi Sunak has U-turned, this time on the financial support available to small businesses – businesses with an annual turnover of £200,000 or less will be able to apply for loans of up to £50,000, with the government bearing 100 per cent of the liability – the banks will be involved solely as intermediaries.

But businesses earning above £200,000 will continue to have to seek loans via the existing coronavirus business interruption scheme (Cbils). Although banks are lending at a rate and speed far beyond that of any new financial product in British history, they are lending at a rate far below that of comparable schemes.

The reason for the banks’ reluctance to lend is that they themselves are on the hook for 20 per cent of the cost in the event of a default. Sunak’s concern is that if you guarantee all loans to 100 per cent then you are encouraging large and reckless lending that will ultimately fall on the state.

But the concern among opponents of the scheme in its current form – which includes not only the opposition Labour Party but multiple Conservative backbenchers – is that in practice, because we don’t know when the lockdown will end, what life will look like when it does, what the fiscal response of the government will be, and how people will behave afterwards, every loan is a reckless one, and that the only way to get the finance that businesses need is to get the state to underpin it. The fiscal cost of some bad loans is of considerably lower magnitude, in any case, than the cost of significant unemployment.

Sunak’s decision to guarantee loans to businesses with turnovers under £200,000 will please a lot of Tory critics of the scheme. But the reality is that the policy argument is not materially different for the United Kingdom’s larger businesses than for the smallest. Lending to them is still highly risky because of the long list of known unknowns about the coronavirus crisis and what happens afterwards.

There are important political differences – small businesses are judged to be sexier, politically, than larger ones – but the only policy argument for easing requirements to provide financial support for smaller businesses, that does not also apply to larger ones is that the Treasury faces a small financial risk in doing so.

That’s probably the biggest single clue yet as to how Sunak will approach the question of what the fiscal response after lockdown should be. As I wrote earlier, the Conservative Party, and the British right more broadly, is split on the issue: some think that the debts accrued during the coronavirus crisis aren’t an urgent concern requiring a programme of austerity like the one that began in 2010, while others believe that they are.

That Sunak has opted to prioritise minimising the state’s direct exposure to coronavirus loans is a good indicator of where he sits in the particular debate: and a sign that his first budget after the crisis is likely to be an austere one.