Only state investment can revive the British zombie economy | Philippe Inman


Britain sinks into a debt crisis that will undermine its prospects of a recovery.

It is not the debts of the government that are at issue; it is the monumental amount of private sector borrowing, much of it from the Treasury, that will weigh like a dead weight on the shoulders of thousands of companies, perhaps for a decade.

Last week Rishi Sunak tore up its much-criticized winter job protection plan and made the humiliating decision to breathe life into her existing leave program. The cheap and not-so-gay Employment Assistance Program (JSS) has been overhauled to the point that it looks almost exactly like its predecessor, the Job Retention Program (JRS), which was due to end on October 30, but now enduring in an old / new guise.

This support for staff and the roughly 2.5 million self-employed workers, while welcome, has distracted attention from the huge and growing number of rescue loans taken out by companies across the country in a desperate attempt to stay afloat.

The most recent figures show that while 623 large companies have borrowed the relatively small total of £ 4.6bn through the Coronavirus Business Interruption Loan Program (CLBILS), 1.2m small Employers accessed £ 47.3 billion from the other two buckets of cash on offer. Treasury – the rebound loan scheme and the coronavirus business interruption loan scheme (CBILS).

Put aside concerns from the National Audit Office that up to 10% of loans were obtained fraudulently and that many employers forced staff to stay on the job when the program demanded they stop, racking up no more debt for anything other than just surviving is not a good business strategy.

When a business can say that the rebound in sales following the easing of a lockdown will allow it to regain lost ground and more, it makes sense to borrow to overcome the bad times. But if the company remains vulnerable to the quicksand of government health policy, its ability to invest over the next few years is likely to be severely constrained – not only by interest payments on debt, but by an inability to contract. other loans. No wonder recent reports have suggested that up to 40% of these loans will turn sour and never be repaid.

Companies that do not reimburse them will have gone bankrupt. Others could find the money to pay them off, to become the next generation of “zombie corporations” – locked in a cycle of generating cash to pay off debt.

In April, the Chancellor said he had no choice but to pulverize these loans across the UK without asking too many questions to avoid a damaging panic and a mountain of job losses.

Some free market economists responded with their usual coldness. They warned the only way to limit the losses was to lower the shutters of the program, turn down other requests and watch the deadwood of UK businesses crumble. Only then could a thousand fresh flowers of entrepreneurship bloom.

More sensible voices implored Sunak to put in place a system that would allow business owners to opt for a debt-for-equity swap. This would allow the government to exchange its loans for a share of the business.

It would be the decision of every business owner to give a stake to the state, but like the BBC program The dragon’s lair As shown, there are many entrepreneurs who are willing to give up a part of their beloved business if it means they can afford to make some crucial investments.

Lord O’Neill, the former Treasury minister, former Goldman Sachs economist and current chairman of Chatham House, proposed such a project. The “dragons” in this case would work for an independent agency that would hire companies that it deems viable in the long term and that agree to meet strict targets – for example on the number of apprentices they hire and the level of training. qualifying.

Of course, this agency would be in the ‘pick the winners’ game – and that’s something the Treasury has always rejected. In 2012, former Bank of England policy maker Adam Posen, an American who now heads the prestigious Peterson Institute in Washington, proposed the creation of two state agencies to offer loans, sidelining the big banks. It was roughed up by the Bank of England and the Treasury.

But with 40% of loans set to go bad already, why not take the plunge now – especially when banks are not only as conservative as ever, but themselves zombies, weighed down by their own growing bad debts?

Sunak is in such a hole that he has to investigate the creation of both an investment agency and a lending agency. Without them, the UK economy risks becoming one of the living dead.

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