The UK's Response to Covid-19

At the budget on 11 March, the government announced a plan of “timely, targeted and temporary measures” to deliver support when and where it is needed. The programs in total summed up to £12 billion. This £12 billion comprises £7 billion of business support funds and a £5 billion emergency fund for the National Health Service in 2020/21. The measures came on top of £18 billion of additional government spending over the coming fiscal year. The total - £30 billion - is equivalent to approximately 1.3% of GDP.

At the time of the budget, the government also welcomed the statement by UK Finance that banks and building societies and credit card providers were ready and able to offer support to consumers, including providing or increasing an overdraft or allowing repayment relief for loan or mortgage repayments. Chancellor Rishi Sunak has since announced that for those in difficulty due to the coronavirus, mortgage lenders will offer at least a three-month mortgage holiday.

Since the start of the crisis, the Bank of England's Monetary Policy Committee (MPC) has cut its key Bank Rate by a total of 65 basis points to a record-low 0.1% by 19 March. That action has been supplemented with other supportive measures aimed to limit the economic disruption from COVID-19. These included:

• A new four-year Term Funding Scheme with incentives to lend to small and medium-sized enterprises will run for a year. Called the TFSME, this program aims to provide businesses with cheap loans, close to the new level of Bank Rate. The BOE stated that it expects to offer more than £100 billion of funds via the scheme, based on a previous 2016 lending initiative.

• The Financial Policy Committee (FPC) announced a reduction in the Countercyclical Capital Buffer (CCyB) to 0%. The prevailing rate was 1%, but it was due to increase to 2% at the end of this year. The FPC believes that this will potentially release £190 billion of lending to businesses.

• The BOE has increased the size of its quantitative easing program by £200 billion to a total of £645 billion.

• The BOE’s Prudential Regulation Committee (PRC) is inviting requests from insurance companies to utilise flexibility arrangements within Solvency 2 to smooth out the impact of movements in markets.

Concerned with the evolution of coronavirus risks to the UK economy, additional measures were announced on 17 March. UK Chancellor Rishi Sunak committed to “do whatever it takes,” signalling that the struggle would not be overcome with a single package of measures or isolated interventions - a strong hint that more may be to come. Note that we are still awaiting the detail on many of these actions. But one key plank of the latest policy commitments is a promise of the chancellor making available an initial £330 billion of loan guarantees – equivalent to 15% of UK GDP. Some additional information on these latest measures, including those in collaboration with the BOE, is given below.

On 17 March, the Treasury and the Bank of England announced action to seek to ensure that “companies have access to the funds they need”. The scheme is known as the Covid-19 Corporate Financing Facility (CCFF) and is intended to help “corporates bridge Covid-19 related disruption to their cash flows”. The new CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity. The BOE will implement the facility on behalf of the Treasury as soon as possible. Commercial paper eligible for the scheme will be that issued by non-financial companies that “make a material contribution to the UK economy and that had, prior to being affected by Covid-19, a short- or long-term rating of investment grade, or financial health equivalent to an investment-grade rating”. The Treasury will fully indemnify the Bank from any losses and expenses arising from it. The Treasury will also make the final decision regarding the eligibility of any business for the facility.

• On Friday evening, Chancellor Rishi Sunak joined Prime Minister Boris Johnson in a press conference outlining a new set of measures to support the economy. More specifically these were aimed towards protecting households who might be laid off, the self-employed and those on welfare. From listening to the press conference, these took several forms.

• The first measure was the Coronavirus Jobs Retention Scheme. This gives a government grant to employers to put employees on furlough, rather than lay them off. This will be of the shape of an 80% payment of an employee’s salary up to £2500 per month (just above the median income). This will be backdated to 1 March and will initially last for at least three months. Mr Sunak said there was ‘no limit’ here and hoped that the cash would be available within weeks.

• Second, the Chancellor introduced a tweak to the Coronavirus Business Interruption Loan Scheme. This will now be available to businesses for 12 months rather than six. Further measures to apply to medium-sized and larger businesses will be unveiled next week.

• Third, HMRC will suspend quarterly VAT payments until the end of June. Firms will have until the end of the financial year to pay (we presume 2020/21!).

• Last, allowances will be raised on Universal Credit, Working Tax Credit, which will include rental support. The self-employed will now have full access to Universal Credit at a rate equivalent to Statutory Sick Pay while the next self-assessment payments will be deferred until January 2021.

• This package came on the back of the PM’s announcement that bars, pubs, clubs, restaurants and gyms must close nationwide, which will of course increase the degree of Britain’s economic pain.

• We are unsure of what the exact cost of the measures that Mr Sunak unveiled on Friday is, which will depend on how many workers are furloughed and how long the package needs to be in place. If the PM extends the scope of the lockdown, as seems feasible, the costs will of course be greater still. Together with the Budget measures and those announced last week, the level of borrowing will rise precipitously this year. Moreover although the cost to the Exchequer from these, recent and any other measures will be considerable, it is likely to be far less than letting the economy crash and burn, both in terms of the public finances, but also of course in lost output and jobs. The economy is bound to take a big hit for at least the next three to six months. What the government and the Bank of England are desperate to avoid is a second wave of economic weakness, taking us into a prolonged recession which would be highly demanding to escape.

• At first sight, the measures announced are a huge deal. We simply cannot remember a period when the government stepped in and subsidised a chunk of people’s wages. This really is quite extraordinary. It is impossible at this stage to say whether it will be enough, but the direction of travel is certainly correct.