The crisis and the public health policy response
We have all experienced the huge social and economic consequences of the COVID-19 pandemic: the decline in UK Gross Domestic Product went from +1.4% in 2019 to -9.8% in 2020 – far worse than the global financial crisis of 2009.
With the initial lockdown introduced as first response, then the tiered-system and local restrictions further down the line, the impact of COVID-19 affected regional businesses in different ways.
Business and the regions: different starting points
National lockdowns led to an immediate and very severe liquidity crisis amongst the UK business population. But the potential impact on businesses largely depended upon their economic ‘starting point’.
There were business populations at higher risk (i.e. without any cash buffer) at the start of the pandemic across the UK. We estimated that within 6 months of the initial COVID-19 lockdown, around 120,000 businesses would run out of cash, and fail.
We see significant variation between locations, with some businesses at severe and immediate risk of failure and job losses. An interesting feature is that both micro businesses and large corporations had the highest failure risk during this period.
Business and the regions: the business policy response
Faced with this liquidity crisis, we found the government’s policy response – introducing three loan guarantee schemes – to be rapid and appropriate for addressing the crisis. More than one million UK businesses have taken out loans under the schemes, so the names are probably familiar to your business:
- The Bounce Back Loan Scheme (BBL)
- The Coronavirus Business Interruption Scheme (CBILS)
- The Coronavirus Large Business Interruption Scheme (CLBILS).
The BBL scheme has issued loans totalling £32.7bn, the CBILS scheme has issued £26.5bn, and the CLBILS scheme has provided £7.1bn. The average loan sizes across the three schemes are £33,000 (BBL), £264,000 (CBILS) and £7m (CLBILS) over the period of March 2020 to July 2021.
In my view, not only was the government’s response very appropriate for addressing the task at hand, but the speed and scale were unprecedented, yet fit for purpose. These COVID-19 guarantee schemes protected hundreds of thousands of businesses from immediate failure, and saved more than 1 million jobs.
Our best estimates show that the support was around £10,000 per job saved. As the crisis extended into its second year, more support meant a greater number of firms and jobs were protected from the crisis; and a protected business has more potential to grow in a post-COVID world than a brand-new business more likely to face setting-up constraints.
Business and the regions: did public money go to those most in need?
Given that not all businesses and regions had the same ‘starting point’ when we entered the pandemic, and the huge structural differences across the UK, we expected the take-up of the loan-guarantee schemes to vary across the UK. If this was the case, it would also make progress towards the Levelling-Up agenda much easier.
We can see a disproportionately high take-up on both BBL and CBILS schemes in firms located in Wales, Northern Ireland, and the North East of England, once the unique reginal characteristics are accounted for. These regions would not be considered wealthy, nor particularly dynamic and productive on most economic measures.
In contrast, we observe a very striking difference in accessing BBL and CBILS loans in London and the South East of England (and for CBILS, only the East of England), given that these regions are significantly wealthier and more economically vibrant than the rest of the UK.
Overall, there is strong evidence that the COVID-19 guarantee schemes offered more support to businesses in the less wealthy regions of the UK.
Levelling up just got easier – what now?
With the economic support during the pandemic, the ‘starting point’ for businesses across regions is probably more equal – or at least, not worse – than pre-COVID. Now, levelling up may be less challenging than it would have been three years ago - what this has shown is that loan-guarantee interventions can be an important tool for crises, but also used as flexible support in levelling-up.
As our economy emerges from the worst of the pandemic, great part of the business population is highly indebted and will struggle to fund new investments. This clearly suggests that there is a role for public policy to help our businesses avoid a low investment, low growth period post-COVID.
Shifting from survival to growth mode is a challenge, but the potential rewards are high for UK businesses and the economy.