Rishi Sunak has won much applause for acting so quickly to inject billions of pounds into the economy to keep Britain from going bankrupt after the foreclosure.
The rookie chancellor has also shown sensitivity in listening to his critics, adapting his bailout program to provide fully guaranteed government-backed Bounce Back loans to SMEs, whose future is the lifeblood of the economy, as well as ‘a new scheme for the self-employed.
Generally speaking, his emergency plan was compassionate, drawing support across the political divide, from the TUC to the freest of free traders.
Decision time: Rishi Sunak won high praise for moving so quickly to inject billions of pounds into the economy to save Britain from bankruptcy after the foreclosure
Now comes another difficult choice for the Chancellor and the Treasury. Should the government bail out some of Britain’s biggest employers who are struggling and have no access to any of the government’s bailouts?
Known as the Birch Project, the Treasury is in talks with Jaguar Land Rover, Tata Steel and others, including the airlines, on implementing some sort of rescue plan to keep them from falling.
Tata-owned automaker Jaguar has been forced to turn to # 11 because it does not have the high quality credit rating required to qualify for the Bank of England’s large business loan programs.
It tells you something about JLR’s unhappy state. Yet it is of great importance to the UK, employing 38,000 directly and thousands of others in the supply chain. Tata Steel too, the largest British steel manufacturer, employing thousands of people in Wales.
To date, the Treasury has indicated that it may be willing to provide support as a “last resort” if the bankruptcy of a business “disproportionately harms the UK”.
Obviously heavy cuts or closings of these two companies would cause disproportionate damage, so some sort of rescue seems to be at stake.
But the question is how should the Treasury best design these bailouts? Should it be loans or equity investments?
Just last week, Andrew Bailey, Governor of the Bank of England, said he had held talks with Sunak on the concept of government ownership.
At first glance, acquiring a stake in these companies, as the French and German governments already do with their car manufacturers, is the preferable option. It allows the taxpayer to take full advantage of government investment.
However, before taking equity, the Treasury must judge whether companies have viable futures in normal times.
Car sales are trending downward worldwide, while the types of vehicles sought by the public are often smaller and more fuel efficient than consumers of yesteryear gas.
The steel industry will be affected by falling global demand and air travel will be limited for years.
The Treasury must ask the Tata group, owner of JLR and Tata Steel, another question. Shouldn’t Indian companies invest more of their own money in British companies until the economy recovers?
Deciding on equity or debt is going to be tricky. It is clear that the Treasury is worried about how far it should go with its bazooka spending.
Forecasts suggest that borrowing this year will amount to £ 300 billion, bringing overall debt to GDP from around 80% to almost 120%.
For the overall health of the economy, and particularly the regions where these industries are based, the Chancellor probably has no choice but to help them.
But Sunak will need a commercial trick as well as compassion to make this call.
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