Rishi Sunak will maintain the current 80:20 balance of liability for the government’s coronavirus business interruption loans, the Chancellor has announced, in what is very probably the biggest call of his political career so far, perhaps ever.
Although the rate of loans to businesses has increased, it is still lagging a number of other countries. Just 12,000 loans have been issued, and a large number come from a single bank. There are two explanations of the problem: the first is that the relatively low uptake compared to a handful of other countries is because the loans are so inherently risky that expecting the banks to take on a fifth of the liability means that they will be reluctant to lend at the scale required. The only way to get the necessary investment is for the government to take on a bigger share of the risk.
That school of thought has a number of advocates behind the scenes in the Treasury team, and has been called for by the shadow business secretary Ed Miliband. But there were also those in the Treasury who thought differently.
They had two objections: the first was that it created a problem of moral hazard, in that banks had no reason not to lend riskily, which would leave the government on the hook for bad loans. The second was that they believe the tweaks to the loans system are now working as they should and that banks will now start lending to businesses freely.
Sunak has come down on the side of the second group. It’s a hell of a risk. I explained why I think the only way to get more lending is for the government to take more of the risk in greater detail here: at the moment, we don’t know for certain what the government’s fiscal response will be after the UK exits lockdown, we don’t know when, how or if we will properly exit lockdown, we don’t know how people will behave if we do exit lockdown, we don’t know what the international situation will be, we don’t know what will happen to international or domestic tourism, we don’t know if the British or global economy will recover and how long it will take.
These are incredibly risky loans for banks to be giving – it seems to my eyes that the question is not “why are British banks lending so cautiously?” but “why are British banks lending at all?” given the long list of uncertainties about what will happen after the lockdown ends.
But, of course, accepting liability for the entirety of the loan is not a risk-free option, either. If Sunak has taken the right action, then he will go down in history as having avoided taking an unnecessary risk with the public finances while providing the necessary support to small businesses. If he’s not, his entry in the history books will be considerably less kind.