When the financial crisis of 2008 hit, the then prime minister Gordon Brown was ready with the big bazooka.
With two of the nation’s biggest banks, Royal Bank of Scotland and Lloyds-HBOS just hours from running out of cash, the then Labour government launched a near one-trillion-pound rescue package for big banks, business and consumers.
RBS and Lloyds were bailed out, the Bank of England launched a £375billion money-printing programme to ensure corporations had access to cash and introduced an emergency ‘window’ when other banks could borrow at low interest rates. A special mortgage guarantee facility was established to prevent the housing market imploding.
Right now, we are facing a situation every bit as dangerous as in 2008-09 – just witness the extraordinary volatility of financial markets as coronavirus has spread.
This time around, however, it’s not the banks and the bankers in the eye of the storm but nearly six million small businesses – the backbone of the British economy – plus some 5.3million self-employed people and nearly a million on zero-hours or short-term contracts, or working freelance in the so-called ‘gig’ economy.
Former Gordon Brown with Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and ruler of Dubai, at a summit in 2012
So when Chancellor Rishi Sunak delivers his first Budget today, he must ensure that these businesses and these people –which encompass everything from construction to tourism and hospitality, retail, leisure and services – do not collapse into bankruptcy as a result of the impact of Covid-19.
I believe that Boris Johnson’s government has a moral obligation to protect them until the worst has passed – and here is how his Chancellor can deliver.
1. Support from High Street lenders
Now is the chance for banks rescued in 2008 to look after their small business and consumer customers – and initial signs are promising.
Lloyds and RBS – soon to be rebranded as NatWest – yesterday sought to get ahead of the Chancellor, with Lloyds pledging to set aside up to £2billion of arrangement fees for smaller businesses (with up to £25million of turnover) impacted by Covid-19.
The bank claims to have contacted up to 10,000 customers already to discuss their cash needs.
RBS/NatWest, the UK’s biggest small business lender, is setting up a £5billion facility to help small businesses. It is also promising to defer mortgage and loan repayments for three months for customers affected in any way by Covid-19, and to raise credit card limits to provide easier access to cash for households in trouble.
When Chancellor Rishi Sunak delivers his first Budget today, he must ensure that small businesses and self-employed people do not collapse into bankruptcy as a result of the impact of Covid-19
However, the best way of underpinning confidence would be for the Chancellor to announce that the Bank of England will open a temporary ‘window’ – with as much as £100billion available – at which the banks can borrow at very cheap rates to help businesses and individuals.
2. Lower National Insurance Contributions
President Donald Trump is proposing a cut or temporary break in ‘payroll tax’ – the equivalent of our National Insurance Contributions – to support the economy.
This is what President George W Bush did immediately after 9/11 and it is widely credited with having saved the US from slump.
A temporary relief on paying NICs – paid by both employers and employees – would be effective because it encourages firms to keep people in work rather than lay them off. It also gives consumers more spending power.
3. A VAT cut
At the height of the 2008 financial crisis, the then chancellor Alistair Darling slashed the rate of VAT across from 17.5 per cent to 15 per cent to persuade consumers to keep spending.
A similar temporary cut now is possible. The Chancellor could temporarily raise the £85,000 limit at which the smallest businesses and self-employed pay VAT, offering immediate benefit to this group.
Britain is facing a situation every bit as dangerous as in 2008-09 – just witness the extraordinary volatility of financial markets as coronavirus has spread
4. Ease corporate taxes during virus epidemic
The Tories have a manifesto commitment to hold the tax which companies pay on their profits at 19 per cent rather than lower it to 17 per cent as originally proposed by former chancellor George Osborne.
However, there is a case to be made for suspending corporation tax for companies with a turnover of less than £25million, while pressing ahead with the cut to 17 per cent for all companies to reinforce Britain’s reputation as a good place to invest.
5. Income Tax
Mr Sunak’s immediate predecessor Sajid Javid reportedly favoured a 2p in the £1 cut in income tax before he resigned last month.
The new Chancellor who believes in lower, fairer and flatter taxes could proceed with the Javid plan. It would put more domestic spending power in consumers’ pockets to make up for some of the lost income from the airlines and tourism bust.
6. Slash interest rates
The US, Canada, and Australia have already done this, and I expect the Bank of England to follow very soon.
At 0.75 per cent, UK rates are already at record low levels. Nevertheless, easing interest rates would lessen the eventual burden for small firms of paying back loans run up during the coronavirus epidemic.
7. Delay the terms of invoice payments
Big companies have a habit of putting the squeeze on smaller suppliers during times of crisis by demanding payment, on the nose, within a month or three months.
The Chancellor could bring in emergency legislation giving smaller firms at least three months free credit before they settle bills.
Mr Sunak’s immediate predecessor Sajid Javid (pictured in parliament last month) reportedly favoured a 2p in the £1 cut in income tax before he resigned last month
8. Business Rates
Suspend business rates for smaller businesses until the worst of Covid-19 has past.
9. Grant employee rights
To reduce the risk of hardship to families in the ‘gig’ economy and introduce sick pay.
10. Capital Projects
The IMF says that for countries with fiscal space – the capacity to borrow more – investment should be sustained. We need to keep on filling potholes, creating bus routes, building new homes – and yes, ploughing on with HS2.
In conclusion, many of these measures would be costly to the Exchequer at a time when it is seeking to ‘level-up’ by spending big on infrastructure in less well-off parts of the country.
But the reality is that the Tories have put the public finances in reasonably good order since 2008, and have rendered the banking system safer.
Given the economic challenge we are facing from coronavirus, the Government is well placed to introduce emergency measures aimed at preserving jobs, commerce and future prosperity.