The government’s coronavirus Budget is sensible – but it’s bad news for small businesses

The government and the Bank of England do at least have a clever, coordinated plan for the economy in general. But whether it actually will work for certain enterprises remains to be seen, writes Hamish McRae

Rishi Sunak poses with the Budget Box ahead of the government’s announcement (AFP)

Finance in Britain is now on a war footing. Expect other countries to do the same. The cut in interest rates and the other emergency measures to support the economy announced by the Bank of England are part of the UK’s plan to combat the economic impact of the coronavirus epidemic. But they are also part of a global drive to give the world economy a monetary boost, and they give some clues as to how the rest of the developed world will act in the days ahead.

The US Federal Reserve has already cut interest rates and is expected to do so again later this month. The European Central Bank meets on Thursday and will announce both some kind of monetary easing including more of the ECB’s version of quantitative easing (QE). But it is clear that cuts in already very low interest rates are not that effective.

In Europe, where official rates are negative, the impact is likely to be minimal. What matters to businesses is not the price of money but rather its availability. So the bank’s plan to establish a term funding scheme for small businesses is an essential element in the package. The other elements of lending support from the government, especially the partial guarantees for emergency loans, are almost certainly more important than the cut in interest rates.

The problem is particularly serious for small and medium-sized enterprises. Large companies can mostly cope. But small businesses can’t suddenly raise additional capital. A central bank can cut interest rates by a bureaucratic decision of a few people sitting round a table, but to get emergency loans to small businesses, you have to work through the banks that have lent them (or need to lend them) the money. You can make life easier for the banks by changing their reserve requirements and bringing in other incentives to lend. But someone has to take the risk and lending money to businesses that can’t pay it makes no sense at all. The UK “temporary coronavirus business interruption loan scheme” announced by the chancellor in the Budget (under which the government would guarantee 80 per cent of emergency loan) looks a clever one, but whether it actually will work as planned remains to be seen.

What is clear is that businesses all over the world are going to need financial help of some sort or other, and governments will set up schemes to give them that. This has to be done on a country-by-country basis. In Europe, Italy has begun by suspending mortgage payments, though it is not clear how the government will fund this. France is expected to announce something in the next few days. Germany announced a package of measures on Sunday night to combat disruption in the supply chains, but top German economists have called for more action.

The US government is under similar pressure but so far its response has been incoherent. President Trump has talked of cuts in payroll taxation but the delay in action has caused US markets to tank. This is not just a monetary policy issue. It is a fiscal one too. Of course, from a global perspective, the US matters most of all and it is troubling that the Trump administration has yet to frame a coherent response.

From a UK perspective, the government and the bank do at least have a coordinated plan. Whether it will be enough, no one can say. As a rule of thumb, coordinated plans are usually more effective than piecemeal ones, but execution is the key. Now it is up to the banks to nurse their customers, especially small and medium-size businesses, through what will be a very difficult spring and summer.