We stand at a fork in the Covid road. In one direction the virus fades away, business opens further and economic recovery gathers real momentum. In the other, we bounce from lockdown to lockdown, with millions losing their livelihoods and the economy remaining in the doldrums for years.
The job of Government is to steer us all along the right road, and that requires the most delicate balancing act of safety against business activity and public spending today against higher taxation tomorrow. From the beginning of the crisis Government has used its control over private sector lending as a major element in getting the balance right. The more help the public can get from debt repayment deferrals, the less they need from the taxpayer, and the more likely they are to accept the damage to their personal finances from lockdown. As a result FLA members have received over 1.8 million requests for help.
The question now is where do we go from here. How is debt to be managed as the crisis unfolds? This needs to be considered over the short, medium and long term, and we have done so in our own proposals paper, “Shaping the UK’s future prosperity: recognising the opportunities for recovery”.
The most immediate problem is that the exceptional and huge cost of loan repayment deferrals cannot continue to be shouldered by the private sector without Government support. The longer that exceptional payment deferrals continue, and the FCA is already considering whether a third round will be needed, the greater the risk that large sums will never be repaid. In consequence, lenders will not have the resources to back the consumer spending and business investment needed for recovery. Government must undertake to absorb some of the risk from the private sector.
The next crunch point comes as the autumn starts. The Government’s support for lending to business through CBILS and other schemes is due to finish at the end of September. This is too early. In its own analysis of the potential course of the virus, the Government recognises the greater risk of it spreading during the winter. We are quite likely to be heading into the period of greatest permanent damage to business just as the schemes are wound up. And turning them on again in a hurry is no easy task. They must be kept going until the spring.
Beyond the winter, with signs of a turnaround hopefully in sight, support for lending should continue but with the focus shifting from survival to building a better, stronger economy for the future. The schemes that have been built should not be thrown away but redesigned to underpin the investment needed to achieve net zero carbon emissions, to raise productivity and to strengthen the spread of prosperity more evenly across the nations and regions of the UK.
Lending has a huge potential to save us from major economic damage and then to help us rebuild, but to achieve that lenders, regulators and Government need to create a joined up partnership for growth.
Published 20 Jul 2020