Economics undergraduate student, Alfie analysed and provided a review of the UK’s Covid-19 bailout strategy for our Economics of Coronavirus blog series.
Alfie wrote the article for our student competition earlier this year, where Economics students were invited to write a blog exploring any economic aspect of the Covid-19 pandemic.
Why the UK’s Coronavirus Bailout Strategy Needs to Change, by Alfie Dundas.
On the 30th March 2020, President Trump signed the largest US financial stimulus package ever seen, at $2 trillion, in the wake of the Coronavirus pandemic. And the UK is not far behind, announcing multiple billion-pound support packages for different sections of the economy, including a £330bn initial bailout pledge for failing big businesses. But questions have been raised over which companies and industries should benefit from the bailout system, one that has been heavily scrutinised since the 2008 financial crisis bailouts – estimated to have cost the US $498 billion in total. But before go into the UK’s Coronavirus response, let’s take a quick look back at the history and economic rationale behind bailouts in the UK.
Simply put, a government bailout is a capital injection into a dying company, most likely through loans or equity purchases, from the state. As a government expenditure, bailouts are ultimately funded through taxpayer money and so should only be approved for businesses whose bankruptcy would have extremely adverse effects on society as a whole, such as job loss, a break down in supply chains, or even mass hysteria (such as a ‘run on the banks’, as was feared in 2008). It is important to remember that such interventions have a very high opportunity cost – since government resources are limited and could be provisioned elsewhere – and so are not just economic discussions, but moral judgments too.
During the 2008 financial crisis, the decision that banks such as Northern Rock, RBS and Lloyd’s Banking Group were ‘too big to fail’ led to over £35bn, £45.5bn and £20.3bn respectively in loans and purchases. Over the following decade, the UK government managed to recoup all of its initial investment into Northern Rock through divestment but lost an estimated £3.2bn and £1.9bn from the sale of Lloyds and RBS shares. Still the largest shareholder, if the government sold their remaining stake at today’s share price (currently under a quarter of what they paid for it) that figure for RBS would jump to a staggering £25bn loss. Despite this, some still commend the avoidance of a liquidation crisis and devastating bank run; others criticise the overwhelming price paid by the taxpayer to keep a famously elitist industry afloat.
Cut back to 2020, where a different crisis has left industry titans from multiple cash-heavy sectors requesting government support packages far beyond the means of the emergency Coronavirus Large Business Interruption Loan Scheme (CLBILS), which supplies eligible corporations with up to £50m in finances, as the pandemic devastates cash flows. The UK’s largest steel maker, Tata Steel, asked the government to lift the £50m CLBILS cap to avoid layoffs from its labour force of 8,500; Universities UK begged the Treasury to pay its promised increased research funding in advance to help offset the £2.5bn they are estimated to lose from 100,000 fewer international students attending next year and Energy UK approached the government for a £100m a month loan scheme, to name but a few.
But arguably the worst hit industry, and therefore the most common place to find bailout requests, is aerospace, as grounded planes and high fixed costs burn through cash each day. For the media in particular, Virgin Atlantic’s £500m loan request seemed almost too good to be true, considering that their founder and figurehead, billionaire Richard Branson, hasn’t paid income tax in the UK for 14 years; famously sued the NHS and has received a significant chunk of the £12bn that Virgin paid out in dividends and stock buybacks over the last five years. It also hasn’t helped that he openly opposed wider bailouts back in 2009, saying that ‘other companies [apart from banks] need to stand on their own two feet.’ It has been over a week since Branson set out his loan request in an online open letter, met with a frosty response, from both the public and the Treasury too. Branson has put up £250m of his own cash (as well as offering his £60m private island as collateral) but hasn’t received a penny.
EasyJet, on the other hand, who moved their Headquarters from Luton to Vienna when Britain voted to leave the EU, received a £600m loan from the Bank of England’s emergency coronavirus fund almost a month ago. But their billionaire founder – Sir Stelios Haji-Ioannou – doesn’t seem to be on such an aligned rescue mission as Branson and his beloved Virgin. Sir Stelios has brought about a vote to remove four of EasyJet’s directors (as part of his ongoing campaign to cancel the budget airline’s £4.5bn contract with Airbus for 107 new planes), an action that has been slated as ‘highly undesirable’ by at-risk CEO Johan Lundgren. Haji-Ioannou, whose family received nearly £60m in dividends last month, refuses to inject any more of his own capital whilst this dispute continues.
It’s hard to figure out exactly what the Treasury’s criteria for bailout applications are. In a letter to airline and airport executives, the Chancellor, Rishi Sunak, outlined three rules: that bailouts ‘would only be possible if all commercial avenues have been fully explored, including raising further capital from existing investors’; are a matter of ‘last resort’ and ‘must be equitable and fair across the sector.’ These seem reasonable but for some reason have been completely ignored. EasyJet has tradeable debt and an owner who refuses to invest; Hungarian-based airline Wizz Air has borrowed £300 million despite CAPA revealing they have enough cash to survive 22 months without flying (hardly on its last legs) and both those airlines can borrow whilst others across the sector cannot. The government has broken its own rules one by one, raising the question: what are they actually trying to achieve?
This is where a wider moral debate begins, as billionaire owners use government support to pay their workers when times are tough. Sir Philip Green and his wife, Tina Green, who were payed a £1.2bn dividend in 2005 before being investigated for the disappearance of his employees’ pension fund in 2016, are using the government furlough system to pay Arcadia’s 14,500 employees. The mentality shift from shareholder pay-outs, executive bonuses and tax havens when business is booming to government bailouts and support package loans when times are tough is an unpopular, and highly regressive, double whammy for the taxpayer. Even Church leaders got involved, requesting that companies registered in tax havens be barred from government support, a call that the Chancellor has wholeheartedly rejected. Since multinationals make individuals rich during a boom period, whilst the UK national debt has tripled since the last bailouts, it’s easy to see why so many are advocating to simply let the failing giants go bust at the expense of wealthy shareholders.
And then there’s the group both government and corporations simultaneously claim to care about most: the employees. Every bailout application cites job loss as a devastating consequence if they aren’t helped out. But would the fall of, say, Virgin Atlantic, really hit employees the hardest? Going into administration almost always pays the workers first (those already on the government furlough of up to £2,500 a month) and theoretically the £500m saved from not bailing out could give each of their 8,000 employees £62,500 each – three years on the company’s average salary. Is there nothing the government could do better with £62,500 for each worker than to keep Virgin Atlantic afloat?
There’s also the potential long-term downside from holding up inefficient companies, with the ‘too big to fail’ attitude all-too-often allowing for complacency and stifling the need for innovation within an industry. Richard Branson himself criticised Obama’s bailout of the automobile industry, saying the money could’ve been better spent trying to (and yes, this is a real quote) ‘tackle climate change and start afresh’ – I’m sure the same could be said about his airline.
The way profits get privatised whilst losses remain nationalised makes it harder and harder to believe that the Treasury’s bailouts truly work in the best interests of the people. Unlike in 2008, the Coronavirus crisis was not caused by risky behaviour in any particular sector and has only victims; any bailout packages approved are less likely to result in future moral hazard. And so the government has an even stronger right to bail out any company it wants this time around, but it should do so for the right reasons. If a failing company is essential for the economy’s prosperity, it should get a loan only when truly necessary, and at an interest rate that could actually profit the nation. If a usually successful company has just been hit with bad luck, the government should demand an equity stake, and should get paid first when the crisis is over, as the economic cycle continues more favourably.
Too many billion-pound companies don’t look after the government or their employees when it’s business as usual; why should the state fall at their feet when times get tough and expect nothing in return?
Read more blogs from our Economics of Coronavirus series.