This article was kindly published by Orthodox Conservatives
COVID-19 will ultimately cost the United Kingdom over £1Trillion.
This sentence is not passing judgement on the government per se but is a statement of fact.
The number is so stratospheric that increasingly it is being captioned in the same way as the debt incurred to the United States and Canada for loans provided for World War II related “one off” expenditure.
In that scenario, the debt took 61 years to clear and doubled with interest payments. As current forecasts of COVID-19 related costs are expected to exceed £500Bn, repaying that amount of debt over a similar timeframe, would comfortably reach £1Trillion. All of which assumes the base forecast does not increase, (which I expect it to) by the time the Rumsfeldian “known unknowns” such as government backed loan defaults are factored in.
Whilst some may feel it is unfair to view the events of the last 2 years through a retrospectoscope, over £70Bn of waste and obsolescence has been readily revealed in recent months.
- Unusable PPE (Personal Protective Equipment) £8.7Bn
- Test & Trace (defunct) £43Bn
- “Coronaloan” fraud £20Bn
However well intentioned and accepting the extraordinary circumstances, this is why “the state is not great” when it comes to large scale procurement (this is far from the 1st state backed IT project that has cost billions and failed to perform) and should never provide a blank cheque to industry as a loan guarantor.
Ignoring the sunk costs of “failure”, focus turns to the variable costs, such as government loan guarantees where very quickly the current forecast cost of COVID-19 can be breached.
In addition to furlough, (where the cost is now “sunk” and fixed, as the scheme has ended), the government guaranteed hundreds of billions of fast tracked loan applications to help otherwise “viable” businesses with access to working (often survival) capital.
Bounce back loans
The current estimated rate of default for the smallest loan cohort, so called, “bounce back loans” where the loan was capped at £50,000, is 37%. Effectively, 3 out of every 8 loans will or have already resulted in default, with no prospect of recovery.
These loans had no capital repayments in year 1 and typically would be scheduled for repayment in years 2-5. Interest rates at the time were low, typically under 4% above base rate (0.15%).
Underwriting of the loans was negligible at best (the fast track, short form process ensured very few were declined) and funds were available for drawdown in under 3 working days from starting the application process. No tangible security was taken for these loans and they were 100% government backed, so no risk to the issuing bank in the event of default.
Coronavirus Business Interruption Loan Scheme (“CBILS”)
For small and medium sized businesses, including those who already had debt on their Balance Sheet, there was more underwriting by the issuing bank and a higher rate of declinatures. Loans of up to £5M were available on equitable terms and the government guarantee was 80%.
As a result of the government guarantee, banks leant vast sums to industry sectors that would normally be considered “above average” risk, such as Construction, which was the number 1 recipient by volume of loan applications and number 2 by loan volume.
Whilst the issuing bank typically took tangible security, as this would typically be in the form of a charge over the assets of the business, in the case of Construction companies, most have an asset base of cash and work in progress. In the event of insolvency, cash has been exhausted and work in progress has inevitably stalled.
Coronavirus Large Business Interruption Loan Scheme
For the largest companies, again including those who already had debt on their Balance Sheet, loans of up to £200M were available on equitable terms and the government guarantee was 80%.
Whilst this segment of the loans is expected to have the lowest rate of default, given the numbers involved, even a modest level of bad loans will quickly add up to a very large government liability.
Whilst the current fraud estimate for “coronaloans” is £20Bn, this does not include defaults arising out of normal insolvency scenarios. It will be several years until the final figure is known but it will be multiples of £20Bn.
Whilst the economy grew at 7.5% in 2021, it contracted by just under 10% in 2020 and GDP remains slightly below pre-pandemic levels. With 2022 growth expected to be around 5% and inflation already at 5.4% (Consumer Price Index) and 7.5% (Retail Price Index), the UK is now being stalked by the spectre of stagflation (where inflation exceeds GDP growth).
Rising interest rates, National Insurance increases, freezing of personal allowances, energy cost hikes and wage increases at below inflation all add up to a year of dramatically falling living standards for UK plc.
Despite the NHS absorbing 40% of all government spending, (over £3Bn a week), waiting lists for elective surgery are increasing by up to 30,000 a week, so declining financial health will be mirrored by debilitating physical health for many (in addition to the mental health time bomb, which is likely to result in declining productivity due to long-term illness).
I welcome Jacob Rees-Mogg’s appointment as Minister of State for Brexit Opportunities and Government Efficiency. The government has failed to date to deliver on the principal benefit of Brexit, deregulation and I hope Jacob’s mandate will be unfettered.
As for “Government Efficiency”, wags may term that an oxymoron. I’ll end on a positive note. The bar is currently set far too low. With even a modest amount of Moggmentum, it should be feasible to improve this dramatically in the remainder of this parliamentary term.
© justchrisdavies 2022