Dr Graham Gudgin is Policy Exchange’s Chief Economic Adviser.

The reactions of the Government and the Bank of England to the Covid-related economic downturn have been impressive, but leave gaps that could greatly undermine their eventual effectiveness. The aims of preventing firms from going under and maintaining the incomes of workers are the right aims both to ensure a strong recovery and to protect personal incomes, but they have to work.

As a new Policy Exchange report, Speed, scale and simplicity, sets out, the aim should ideally be that no business fails due to circumstances related to the virus. At the same time, personal incomes should be maintained. All of this needs to be much stronger than the conventional safety nets of past recessions. Luckily, low global inflation and associated low interest rates make it possible for the government to finance these unprecedented ambitions without disastrous consequences for public debt.

Government aid to cover 80 per cent of employees’ salaries and a similar amount of self-employed incomes appears to be only partially successful. The huge increase in applications for Universal Credit (reported as close to a million over the last two weeks) means that many people have been released by their employers or are self-employed people whose income has largely or wholly dried up. Unemployment is much worse financially and emotionally than furloughing, and more thought should be given as to how firms can be persuaded to keep staff on their books.

One issue for policy is whether supporting more than 80 per cent of salaries up to £2,500 a month could persuade firms to furlough more of their employees rather than laying them off as many seem to have done. However, few firms have complained that the 80 per cent limit is too low. They resist the idea of a higher level on the grounds that retained staff who are still working would resent being paid the same as those who are not working.

The main immediate problem for smaller firms is the delay in receiving the subsidy. The Government has indicated that firms will be paid by June, but many expect the wait to be longer. Ironically, the pandemic is expected to be on its way out by that date. In the meantime, companies are expected to fund the wage bill themselves for furloughed staff.

The deferment of VAT payments for three months is a considerable boost to cashflow and has been welcomed especially by smaller firms. Similarly, deferring business rates is a very considerable help to businesses in the retail hospitality, leisure and nursery sectors. HMRC also appear to be willing to defer other tax payments including PAYE and corporation tax if requested, even though these are not part of the formal rescue package. The Government’s offer to pay two weeks statutory sick pay also helps cashflow.

Since it is easier for the Government to borrow than for firms, especially small firms, the aim should be to make furloughing costless to firms. Government should press firms to keep staff on their books as furloughed employees, rather than swelling the numbers of unemployment by laying off workers. This should include re-engaging staff already laid off. Firms could be given 100 per cent of staff earnings to decide themselves how to allocate this across retained and furloughed staff. Similarly, self-employed people without a long enough tax history of profits should receive support through a direct grant at above the level of support receivable on universal credit.

Consideration might be given to extending the sectoral coverage of the business rates holiday. Grants to small high street firms have started arriving today but other ways also need be found to get money rapidly to a wider set of employers. This could include loans for furlough wages backed by 100 per cent government guarantee or payments to the agents who handle wage payments for many small firms. Some businesses should be allowed to re-open sooner than others, particularly those like garden centres dealing in perishable goods.

Another issue is the exclusion from the scheme of employees hired since March 1st. This exclusion hits faster-growing firms hardest since these have most newly hired staff. There can be a perverse incentive for firms to lay-off recently-hired skilled people and to keep less qualified people purely because they have been on the firm’s books longer. A better cut-off date might be the date on which the Job Protection Scheme was launched.

One of the weakest aspects of the package is the loan guarantee arrangements which leaves 20 per cent of the risk with banks themselves. The potential extent of the guarantee is large at £320 billion, but it seems that the money is difficult to access.

Smaller firms report considerable difficulty in contacting their bank at all. Many take the view that their banks have limited interest in a scheme which leaves risk with the bank for limited gain. Some banks have decided not to take part, others required personal guarantees for 20 per cent of the loan although government rules now prevent this. The Chancellor, the Bank of England and the Financial Conduct Authority have recently written to banks to urge them to operate the loan scheme as intended, but more pressure seems likely to be needed.

Fixed costs, including rents, imperil the survival of many firms especially in the retail, restaurant, and hotel sectors. Many firms are attempting to share the burden of reduced revenues by renegotiating rents The financial hit is thus passed on from one sector to another. Some encouragement might be offered to landlords, including property companies and other to defer rents and fees for their tenants and clients. The Welsh government is addressed fixed costs for small firm and the rest of the UK should follow suit.

All of this is mainly a matter of keeping firms afloat. Anecdotal evidence suggests that many people are content to have an extended holiday with a pay cut of 20 per cent. Important measures have been announced to support mortgagees and renters and a guarantee has been made of no evictions within the next three months.

Any householder or landlord with a mortgage who is facing financial difficulties related to Covid-19 can apply to their bank or building society for a three-month mortgage repayment holiday mostly without affecting their credit scores. An equivalent scheme applies to renters. Oddly, mortgage relief this does not apply to those with existing mortgage arrears who, it might be thought, were most in need of relief. Both schemes are in effect a loan and unpaid mortgage and rents will need to be repaid later.

The economic aim overall should be to avoid recessionary knock-on effects due to displaced workers cutting their expenditure and to allow a spending surge when retail and other businesses reopen. The shutdown should resemble an extended weekend when spending is restrained but incomes are maintained. Much has been done in this direction, but the job now needs to be completed by shoring up workers’ incomes and firms’ revenues to as close to 100 per cent as is practical.