When the UK entered lock-down in March the Government’s strategy – based more on hope than science – was for a few months of lockdown followed by a warm summer so that the country could return to normal in the Autumn. We were told that “we could turn the tide on the virus within 12 weeks”, that a vaccine would be available in September and then that “it could all be over by Christmas”.
They now admit that we are facing a very difficult winter. Coronavirus has not been beaten. The social and economic consequences of seeking to do so are going to have to continue. There is a dawning awareness that coronavirus, or some version of it, is here to stay.
And yet the Government does not seem to want to talk about the economic consequences. Nor does it seem to realise – or chooses to ignore – that far more stringent measures are needed.
The arrangements that were hastily and indiscriminately introduced in March and April assumed that taxes that have been deferred are going to now be paid; that mortgages can now be caught up with; that loan repayments can begin, and so on. These simply do not stack up if the economy is heading into another period of downturn.
There are three measures that the Government should take:
- The financial deferral arrangements that have been put in place need to be reviewed and many of the taxes that are now owed need to be added to the loan balances already due by businesses.
- Many of the outstanding loans that have been provided to businesses will not be repaid within the time frame set for their repayment. Those loans must either be turned into grants or shares in the businesses to which they have been made. Clearly shares is the better option, which would need the creation of an organisation similar to the post-war ICFC, so that there is an upside for society in the case of those businesses that survive.
- For many businesses cost structures have fundamentally changed as a result of this crisis, with reduced activity and lower profit margins now being normal, and so it will not be possible for these businesses to continue in business and to pay the rent and other occupancy costs that they committed to before this crisis began. Something has to give if these businesses are to survive. There are, in effect, only two choices. Either rents have to reduce or employment will. This leaves any sensible Government with only one choice, and that is compulsory rent reductions.
This third measure will have serious consequences that will need to be managed. Many landlords are heavily geared and so reduced income will adversely impact their lenders. But whatever happens, landlords are going to take a massive hit because of this crisis as past levels of rent are no longer viable. It is better to do this now before widespread commercial property vacancies become normal because of the failure of tenants. The choice that the government faces is between managing this issue, or letting it happen chaotically.
That these measures should be targeted should also be obvious; the grants and loan guarantees handed out over the past six months have been gifted to many businesses that don’t need them and overlooked many – such as the self-employed – that do. Schemes such as ‘eat out to help out’ actually increased the rate of infection as the Government subsidised some of the highest risk locations.
Despite all the support that should be supplied over the coming months, a changed economy will require a different range of businesses and business models to service it. Whatever happens, many existing businesses are going to fail: that is completely unavoidable. But, in that case, and given that patterns of working are going to change radically, a recognition that both socially and economically things are never going to return to the ‘old normal’ is required and structures put in place for the new normal.
It is time for the Government to be honest, acknowledge the severity of this crisis,plan several years ahead and develop a long term economic strategy.