CLAIM
“We must act like any wartime Government and do whatever it takes to support the economy. We may have to go further and faster in the coming days to protect lives” – Boris Johnson, 17 March.
DOORSTEP ANSWER
THE Tory Government’s coronavirus economic package is far smaller than the bank bailout of 2008. At best, the job retention scheme is worth only seven per cent of the money that went to the banks.
THE BANK BAILOUT
THE global banking crisis of 2007-08 nearly destroyed the UK financial system. The crisis arose from reckless (often hidden) investment by banks in complex new kinds of assets whose underlying value was obscure and frequently non-existent. Between 2007 and 2010, HM Treasury made a series of large financial interventions to maintain the solvency and ongoing stability of UK banking. This was "justified" to head off the potential economic damage of the big banks going bust and to preserve depositors’ savings.
Public intervention was of two main kinds: (1) provision of Treasury guarantees to support bank operations; (2) provision of cash in the form of loans or the purchase of shares in RBS and Lloyds (i.e. nationalisation). According to the National Audit Office, the official watchdog over public spending, peak Treasury support was £1.2 trillion.
This was divided between a cash outlay of £133bn and guarantees of £1029bn (see NAO website). In addition, at least £107 million was paid to private City advisors because the Treasury was too "stretched" to cope with resolving the crisis.
The Treasury bailout included buying £76bn of shares in Royal Bank of Scotland and the Lloyds Banking Group; indemnifying the Bank of England against losses incurred in providing more than £200bn of liquidity support; guaranteeing up to £250bn of wholesale borrowing by banks to strengthen liquidity; providing £40bn of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and insurance cover of over £280bn for bank assets.
More than a decade on, the UK Treasury is still providing financial support to the banking system, though some guarantees have been withdrawn. As of March 2019, total current support stood at £34bn including a cash outlay of £20.5bn.
COVID-19 BUSINESS FINANCE PACKAGE
THE coronavirus crisis is still ongoing so a definitive calculation of total public financial support to deal with the lockdown is not available. The loss in tax revenues is considerable, meaning the Treasury will have to borrow the difference to maintain public services. Public sector net borrowing could reach 14% of GDP this year, the biggest single-year deficit since World War Two. Yet the total National Debt, as a proportion of national income, will still be less that it was at the start of the 1960s, while the current cost of borrowing is virtually zero.
Working with data released so far, we know the following: On March 17 Chancellor Rishi (a former banker) announced a £350bn support package for businesses affected by the lockdown. That is less than one third of the total 2008 bank bailout scheme – hardly “doing whatever I takes”.
Much of this business support is funnelled through bank lending to small businesses. However, on 3 April, the Chancellor was forced to step in and order banks not to impose personal guarantees on loans under-written by the Treasury, in order to speed up delivery.
On 12 May, the Treasury published new statistics indicating that only £14 billion in loans and guarantees had been issued to support business cashflow during the crisis. This included 268,000 Bounce Back Loans worth £8.3bn, 36,000 loans worth over £6bn through the Coronavirus Business Interruption Loan Scheme, and £359m through the Coronavirus Large Business Interruption Loan Scheme.
COST OF JOB RETENTION SCHEME
THE other key part of the Treasury support package is the job retention scheme. Under this scheme – now due to run until the end of October 2020 – the government pays 80% of wages of workers laid off because of the medical crisis, up to a maximum of £2,500 a month. The Chancellor has announced that from August employers will be required to contribute more to the financing of the scheme.
How does the cost of the job retention scheme compare with the bank bailout? As of May 12, the Treasury indicates that claims under the job retention measure had reached £10.1bn. Scaling this figure till the end of October suggests a total cost of circa £40bn-45bn, minus any contribution from employers.
However, everything depends on the total take-up, which has been rising. According to the latest Treasury figures, some 7.5m workers have applied for wage support under the scheme. But the respected Resolution Foundation think tank estimates at if the crisis is prolonged then at least a third of private sector employees – somewhere between 8 million and 11 million people – will be furloughed.
The Resolution Foundation estimates that would cost £30bn-£40bn over three months – roughly similar to the amount the government spends each year on police in England. A lockdown till October would double that figure.
CONCLUSION: BANKS GOT MORE
IF one adds up the very highest estimate of the job retention scheme (from the Resolution Foundation), the total coat to the Treasury reaches only circa £80bn. That sounds a lot, but it is less than roughly 7% of the £1.2 trillion provided to the banks after the 2008 crisis.
FACTCHECK RATING:
More Boris bluster. The Government still has a long way to go to prove it is treating the economic threat from Covid-19 as seriously as it took the bank crash.
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