Daily Coronavirus Webinar: in discussion with George Osborne

Overview:

Today's webinar took the form of a conversation between Carolyn Fairbairn, the CBI’s Director-General, and George Osborne, the editor of the Evening Standard and, of course, a former Chancellor of the Exchequer. George was Chancellor during a particularly challenging period, the aftermath of the financial crisis and the period of fiscal tightening that followed – so we were particularly grateful to hear his views about this new, surely even more challenging period.

Among the issues that Carolyn and George discussed were:

• How to improve access to finance
• The latest developments on the Job Retention Scheme (JRS)
• Thinking about the future – now
• One question for the future: debt
• Another question for the future: surveillance.

Improving access to finance

As the end of the month approaches – and, with it, the demands of payroll – businesses need money, fast. Some of the mechanisms for getting this money to them are now in place and appear to be working.

Carolyn highlighted the new CBILS+ for companies that previously occupied the “stranded middle”; too big to qualify for the government’s main Coronavirus Business Interruption Loan Scheme (CBILS) and too small for the Bank of England’s corporate debt buy-up. Now it is up and running, Carolyn observed, CBILS+ is a “lifeline for regional employers across the country”. She even went so far as to issue “three cheers” for it.

There was praise, too, for the Bank of England’s scheme, officially called the Covid Corporate Financing Facility (CCFF). Carolyn explained that this “seems to be working well”.

However, CBILS itself is still proving to be, in Carolyn’s words, “tough going”. Only £1.1 billion has made it to 6,000 companies, well short of the £330 billion that has been earmarked for the scheme. The CBI has four proposals to speed things up, which Carolyn set out:

1. Raise the government’s guarantee from 80% to 100%, particularly for smaller loans.
2. For smaller companies, for loans up to £25,000, use existing overdraft facilities as a “bridge” to CBILS.
3. A range of smaller technical improvements that would hasten the whole process.
4. “We do need more grants,” not least because many businesses are either unable or unwilling to take out loans. These grants could be tied to rates.

George endorsed the first of these proposals, in particular: “If you ask banks to take on some of the risks of a loan, they are – understandably – going to assess whether that risk is worth taking…. This has created a real blockage, particularly at the smaller end.”

He also emphasised that the banking system remains the best way of administering the CBILS system: “We need to work with the network that already exists”. Improvements are, he added, a question of making sure that “incentives” are aligned between the government and the banks. “You can’t just scream at the banks… I remember trying that, and it didn’t do much good!”

The latest on the JRS

Even since the CBI’s last webinar on Friday, it has been a time of change and clarification for the government’s JRS. The biggest and most welcome change was the announcement that came on Friday afternoon: the JRS will be extended from the end of May to the end of June. This provoked, said Carolyn, a “big sigh of relief around the country” – in part because it solved the problem of the cliff-edge date of 18th April, when businesses might otherwise have had to think about redundancies.

What’s more, HMRC’s online JRS portal, through which businesses will be able to claim money from the government, was launched this morning – and audience members reported that they had already signed up and are finding it “easy to use”.

We have also received confirmation of how holiday time will be treated within the JRS. This is an area where the CBI has heard lots of questions from members, so it was good to get clarification in three respects. First, furloughed employees do accrue holiday time. Second, they can take annual leave while on furlough, at normal rates. Third, employers have been given more flexibility to control when leave can be taken. The government will, apparently, keep all of this under review.

And it has also been confirmed that, while companies do need to write to their employees to inform them of any furlough, the employees do not need to write back in order for the furlough to be valid. As Carolyn said, this sounds “techie” – but it is an important clarification for businesses who might otherwise have worried about whether their furloughs actually counted.  

Thinking about the future – now

What happens after the lockdown? When, indeed, do we start to relax the conditions of the lockdown? In response to this line of questioning, George said something that he admitted was “controversial” – “you can’t just rely on the health and scientific advice”.

He gave three reasons. First, that the scientific advice is constantly changing. Second, that even the scientists don’t agree about it. Third, that the health issues are only one strand of a wider tapestry of issues that result from people staying home and not working. “That’s why people elect governments,” he added. “To make these sorts of trade-offs.”

He thinks that the government should start setting not a “clear exit” from lockdown but at least sense of how that exit might be achieved. What data will be used? Who will be involved in the decision? “So you don’t get the impression that the decision is taken on a sofa in Chequers.”

Carolyn supported this line of thought by calling for a “plan for a plan”. Permanent scarring to the economy is prevented by two things, she said: having the right financial packages in place now, and by having a plan for reopening. After all, many companies are in a tremendously difficult position – not least when it comes to supply chains. Carolyn cited the example of an automotive company saying, “we can start thinking about reopening, but if the dealerships aren’t open, there’s no point!”

Of course, personal protective equipment (PPE) remains an important part of any restart planning. As Carolyn said, “our call to action continues on that.” Any companies that can help to source, or even produce, more PPE can contact us at businessheroes@cbi.org.uk

The question of debt

George emphasised that, once the crisis is over, there’s going to be a lot of indebted governments and businesses. Cooperation from central banks, who have kept interest rates low, has made this accumulation of debt less painful than it might have been, but there has still been a massive accumulation that will need dealing with.

When it comes to the public debt, George suggested that we will probably go “back into a period of retrenchment”. He added that the Treasury is helping itself now by keeping businesses operating and people employed – but “you can’t be running a 14% budget deficit year after year. The country is poorer. You’ve got to cut your cloth accordingly.”

As for the business debt, George floated the idea of some sort of “debt forgiveness” – that is, the debt being written off. This would have to be done carefully, so as to avoid “anxiety in credit markets, which are working well” and triggering another financial crisis. “But there is a separate question about governments saying that they might forgive this debt.”

The question of surveillance

Both George and Carolyn lamented the absence, so far, of proper international cooperation over the pandemic. And neither thought that we should be withdrawing from China – quite the opposite. As Carolyn put it, “They’re going to be one of the few economies that will continue to grow in this period. We need a China strategy more than we have ever needed one… we’ve had China tactics in recent years.”

But George also raised another aspect of our relationship with China and other Asian countries: “If it’s true that Asian countries dealt with [the coronavirus] better because they had better technology and surveillance of their citizens, are we going to allow governments in the west to track us – through the technology in our phones – in ways we wouldn’t have been happy with before?” In fact, he cited this question of “technology and surveillance” as one of the “big challenges” of the years ahead.

Key questions we answered:

1. To Carolyn: What is the latest thinking around long-term economic recovery?

• It’s important to note that not all sectors are in the same space – some starting to think about restart (manufacturing) – others simply focusing on survival (retail, leisure).
• Practical questions being raised by firms: challenges around people, supply chain and cost.
  • People: furloughed workers hesitant to return to work due to caring responsibilities, or perceived risks to health. Businesses reluctant to compete with NHS and care homes for PPE.
  • Supply chains: manufacturers told us that to restart factories, they need customers ready to buy, suppliers ready to sell and transportation & logistics infrastructure.
  • Non-essential retailers (e.g. clothing stores) have also been in touch: many have spring stock on shelves, but demand is a real worry.
  • Costs: many facing deferred costs after lockdown – delayed rental/mortgage payments, owed taxes, utilities bills, and extended payment terms to supplier. Also, costs associated with new hygiene and PPE processes and standards required for safe workplaces.
• All of which means planning for an exit strategy is essential – cautiously, listening to health experts, and in partnership across business, government, unions, nations: national consensus.
• We see this as a three-stage process:
  • Restart: how to re-start firms currently shut down?
  • Revival: economic & policy measures to revive the economy, boost demand?
  • Renew: taking lessons from crisis, what decade of renewal might look like – climate change, skills, empowering regions. Might be good to hear from George on ‘levelling up’ agenda given his work with Northern Powerhouse.
• There won’t be a ‘big bang’ moment – will be a gradual shift to ‘new normal’.

2. What are the CBI’s priorities for the next few days?

• First, delivery of key business support schemes:
  • The JRS portal launches today – laser focus on the ‘on-the-ground’ experience for business.
  • On CBILs – continue to have conversations with HMT about firms that still need support – particular focus on small firms and those ‘larger’ SMEs.
• Second, supporting efforts to tackle the PPE shortage:
  • Speeding up response times on government contact services: critical that business that can help are utilised at speed.
  • Supporting PPE manufacturers to understand demand and manage risk: two suggestions – either purchase early orders, or bulk purchasing or raw materials on behalf of industry.
  • Firms need clear guidance on private sector usage of PPE: government should publish guidance on where it’s most needed.
• Finally, building out the UK Revival Plan:
  • Looking at which sectors may be best placed to restart earliest – using our TA network. RNS discussing with our Economic Growth Board this morning.
  • Talking this week with TUC and Labour Party about need for consensus building – Kier Starmer and colleagues keen to hear views.
  • Following up with Mark Sedwill’s team who are leading on government’s initial thinking along with colleagues in BEIS and HMT.

3. To George Osborne, out of the government’s £330bn committed through its various loan schemes, only £1.1bn have reached businesses so far. Do you think the problem is that you cannot distribute money to bad risks in a crisis through the commercial banking sector? Is there a different way of distributing the money?

• The Treasury put in place a number of schemes, which were rightly seen as being world-beating at the time. It is important not to lose sight of the successes we have seen. E.g. the VAT deferrals and the fact that the furlough scheme is operating relatively smoothly.
• The small business loan scheme does need fixing in the way the CBI is suggesting as there is an inherent problem. If you ask banks to take some of the risk of a loan, they have a responsibility to their shareholders to assess whether that is a risk worth taking. This creates a blockage in delivering the loans to companies.
• Other countries like Switzerland have removed the blockage as if the loan is up to £250,000, the government will cover it entirely.
• However, the banks are the only groups that can deliver these loans effectively. Millions of businesses have already developed a relationship with their banks, who have the necessary details, account numbers etc, to get the money out to them quickly.
• You may also have to change consumer protection laws, which are hindering banks ability to deliver some of these loans.
• Government could consider writing off some of the debt further down the line.
• You need to get money to the firms now, so speed is essential. Nationalising RBS or creating new schemes with the insurers is not an option. You need to work with the networks businesses have, i.e. with a bank account. That is how you get this money to the firms as quickly as possible.
• At the moment, the incentives are not aligned. The incentives of the banking system need to be aligned with the government and the last thing we want is the banking sector collapsing because it takes bad risks on loans without deploying the appropriate risk assessments.
• The government needs to underwrite the risks and then the small businesses will get more loans, more quickly.

4. If you were the Chancellor, what would you be most worried about the next 3 – 6 months and how would you look to address it?

• The single biggest issue is the permanent scarring to the economy due to businesses collapsing and people becoming unemployed.
• We know that once people are unemployed for a prolonged period of time, it is harder to get the back to work.
• That is why the money needs to flow right now so these firms do not collapse.
• The government is coordinating with the Bank of England to ease the fiscal burden on the public finances.
• You do not want a portion of your small businesses wiped out and a couple of million people ending up unemployed.

5. Regarding the potential plan for a re-start of the economy, what would you consider the government’s role to be and do you foresee a second wave of government support for businesses as they emerge out of this crisis?

• On the exit from the lockdown, you cannot solely rely on the health and scientific advice. Partly because the advice changes as we learn more about the virus, secondly because the scientists don’t always agree and thirdly because the health advice is just one very important component of a set of concerns you may have – e.g. education being halted, domestic violence increases etc.
• On the lockdown and communicating an exit strategy, people are more alert to news than ever before. People can see what other countries are doing. They see various commentators and opinion-formers framing the debate on what should happen next. The government shouldn’t be silent during this period.
• The government needs to fill the vacuum that is being created by their silence and set out a clear way that this approach will be taken. This could include the data they will use, advice they will take and the approach they will take to decide when the lockdown ends.
• On the debt, you need to repair the roof when the sun is shining. One of the primary reasons we implemented budget cuts was so that were the storms to come again, we would be in a better position to deal with them.
• We also have huge international coordination taking place between the US Federal Reserve and European Central Bank, keeping yields down to allow governments to borrow large sums of money.
• When this is over, there will be huge debt and hard economic choices will have to be made. We will have to go into a period, not exactly like the last period, of retrenchment and bringing the public debt down. We can focus on that later. Money spent now will help the situation later easier. If, for example you keep people in work and small businesses alive – that saves you money in the longer term.

6. To George Osborne, will that scale of debt be paid off by tax-rises or a global debt forgiveness moment?

• In the last financial crisis, we didn’t see a global debt forgiveness movement.
• The government may consider forgiving small businesses on their debt.
• It's unlikely we'll see a bailing in of the creditors as that would send a huge amount of alarm through the markets which are operating relatively well.
• There are lots of success stories in terms of our healthcare system remaining resilient and businesses not going into freefall on scale, so you don’t want to tamper with the financial markets in a fundamental way that causes uncertainty for the creditors.

7. To George Osborne, what can be done to help restore confidence and activity in the economy?

• You have to be realistic. The country will be poorer.
• Private sector demand will be lower going forward as we will be in a recession, if we are not already, when this crisis subsides. All of this assumes there is an end in sight.
• Government is already pumping billions into the economy. Running a deficit is a form of fiscal stimulus.
• Now is the time to drive through infrastructure delivery projects to create confidence and demand.
• Projects like HS2 need to be backed at this moment to inject government demand into the economy.
• However, we have to realise that it won’t be feasible to run a 14% budget deficit year after year after this crisis.

8. To George Osborne, what do you envisage as being the biggest long-term debates that may emerge out of this crisis?

• The biggest change will be about the nature of technology and surveillance debate going forward.
• If it is true that Asian countries dealt with the virus better because of the greater surveillance of their citizens, it will raise the question on whether we allow governments to track and monitor us on the grounds of public health? That will be one of the most interesting debates going forward.
• After the banking crash in 2008, we asked banks to hold a lot more money and build up capital reserves. They all complained then but are not complaining now as it is sustaining them through this crisis.
• Investors, regulators and governments will ask our companies that they have more capital reserves and can withstand periods of activity lapses better. That will be the bargain government will try to make with companies in the future.

9. To George Osborne, has this crisis made you re-think the UK’s relationship with China?

• There is going to be a serious global investigation into how this virus emerged and China’s role in that.
• The problem would not be made better if we had a worse relationship with China and other key players in the world.
• The near total lack of international leadership or a global response has been the biggest failure of this crisis.
• In 2008, there was global coordination and that helped mitigate the crisis.
• In 2008, China massively increased the economic stimulus in their own country and that helped the west.
• Today, we are seeing the future of the World Health Organisation being called into question at the very moment it is most needed.
• You would think that the G20, with this problem affecting all of its members in a very similar way, would be tailor-made for this situation. But alas, there has been a vacuum of international coordination thus far.

10. To Carolyn, is the lack of global coordination becoming a problem on the business side?

• The lack of global response is becoming a serious issue.
• We know that 48 countries have protectionist measures in place that have been implemented in the last few months.
• We will need to retain demand in this next phase. This will require coordination of monetary and fiscal policy globally.
• Where that leadership comes from is not clear.
• The importance of China is that they will be one of the few economies that continues to grow during this period.
• Our members will re-orientate towards growing markets after this. We need a China strategy more than ever; we have had China tactics but need a developed strategy.
• We will need a competitiveness lens going forward. China and Germany are looking for opportunities as they come out of this.
• What is the British economy going to look like? A revival of the industrial strategy would be welcome, assessing where China is looking to grow.