Covid-19 and the UK economy and its businesses

The UK government used the 2020 Budget announcement on 11 March to unveil its measures to protect the economy from the effects of covid-19. Since then, it has introduced further measures to hold back the spread of the virus, which will have further negative repercussions on the economy.

The lockdown announced by prime minister Johnson yesterday will leave many businesses closed for the duration. Support from the government in the form of tax relief, low-cost loans and help for employees is intended to stave off mass bankruptcy, especially among SMEs.

Measures announced in the Budget
The Bank of England eased monetary policy, lowering interest rates to 0.1% (from 0.25%), while finance minister Rishi Sunak announced a £30 billion or 1.3% of GDP, giveaway for the coming year, made up of £12 billion of immediate virus-related spending. In the budget speech Mr Sunak said that the best response was a “temporary, targeted and timely” boost to support demand in the short run and try to stop hard-hit firms going out of business.

The Bank of England reduced base rates by 50 basis points, a bigger cut than investors had expected, followed by another 0.1% last week, a record low. It also introduced a new facility to give banks access to cheap liquidity to sustain lending for SMEs.

Mr Sunak outlined a three-pronged strategy to cushion the blow from the virus on the public services, on households and on businesses. He pledged to give the NHS whatever financial resources it required, with £5 billion immediately set aside as an emergency-response fund. Support for households will take the form of early entitlement to sick pay for those required to isolate themselves and easier access to welfare payments for the self-employed and those working on zero-hour contracts.

Support for businesses, especially SMEs, was the most substantial element. The main goal was to ease potential cashflow problems. Firms with fewer than 250 employees will have statutory sick pay paid for by the government. The ‘time to pay’ scheme, which allows firms to restructure their tax payments, will be extended. Business rates, a particularly heavy burden for many British SMEs, will be cut to zero for the coming year for most small firms in industries such as retailing, hospitality and leisure. Some 700,000 micro-businesses eligible for business-rate relief will receive a one-off payment of £3,000 to help them manage.

The reaction from the main business lobbies was positive. The British Chambers of Commerce welcomed the chancellor’s efforts to help firms manage their cashflow (see reaction here). Deloitte’s chief economist said the Treasury’s and the bank’s actions as “a forceful and convincing response to the crisis”. Easier credit conditions and a delayed schedule of tax payments should help to prevent thousands of insolvencies over the next few months.

Whether these measures will prove sufficient will depend as much on epidemiology as on economics. The ultimate impact of the virus is still impossible to quantify.
Even excluding any covid-19 related economic slowdown, as well as the £12 billion response package announced so far, the government is set to borrow significantly more in the next five years than previously planned. The deficits planned in 2019 for the years from 2021 to 2024 have all been revised up by more than 1% of GDP.