Will the government’s coronavirus bailout work?

Analysis: Are the criticisms of the £350bn package justified? Is it likely to work in mitigating the economic damage from this emergency? Ben Chu investigates

The business secretary Alok Sharma says the government is ‘looking very actively’ at doing more (AFP/Getty)

The government’s £350bn coronavirus bailout package for the economy has been criticised as insufficient by the Labour Party, some industry lobby groups and trade unions.

The fact that much of the assistance for firms is in the form of loans, rather than grants, has been cited as a deficiency.

So has the fact that it does too little to incentivise firms to retain workers, relative to schemes in Denmark, Germany and Sweden.

The lack of assistance for renters is seen as another glaring problem.

So are these criticisms justified? And do they mean that this package will not work in containing the long-term damage from the coronavirus economic shutdown?

Should there be grants instead of loans?

It’s worth noting that the government is offering grants to many small companies. Some 700,000 will be able to access grants of £10,000 each. And many pubs and restaurants, which have been particularly hard hit, will be able to get grants of up to £25,000.

But it’s true that the bulk of the package is the form of loan guarantees from the government to commercial lenders.

Treasury sources told The Independent that the advantage of this mechanism was that it makes it easier to target resources to firms.

Analysts say these loan guarantees do, usefully, reduce the possibility of a financial crisis if loans to banks go unpaid.

But others say that it does rely on companies borrowing from banks to get through this crisis. And debt aversion at a time of grave uncertainty may put firms off.

“The long-term value and viability of businesses taking up the loans will be reduced,” notes Paul Johnson of the Institute for Fiscal Studies.

Why is there no help for renters?

Most people who take out a mortgage to buy a house borrow from one of the handful of main UK banks.

It’s relatively simple for the government to get banks, which are all regulated tightly by the Bank of England, into one room to agree forbearance for distressed mortgage borrowers.

But there are estimated to be more than 2.5 million UK residential landlords, making it impossible for the government to do something similar in the rental sector.

Yet this is a big gap.

The most recent English Housing Survey showed that in 2019 around 29 per cent of households had a mortgage.

But 19 per cent of households were private renters – some 4.6 million households.

Any financial assistance package that does not reach this group is plainly incomplete.

Which is no doubt why the business secretary, Alok Sharma, said on Wednesday that the government was “looking very actively” at this area.

What about workers?

The Danish government has told private companies that it will cover 75 per cent of employees’ salaries if they promised not to cut staff.

Germany is expanding a government-subsidised scheme, which worked well during the financial crisis a decade ago, to compensate workers who are sent home.

Some are asking why the UK government cannot do something similar.

The Treasury argues that the same institutional mechanisms do not exist in the UK labour market.

And such a scheme would not help the self-employed, who now make up 15 per cent of the UK labour force, or those in the gig economy.

Nevertheless, this lack of direct incentives for firms to retain workers is plainly another weakness of the official plan – and another area that the Treasury says it is working on to improve.

Time, though, is of the essence, with warnings abounding that companies will soon start laying off workers.