Angus Groom is a Research Fellow at Onward and the author of ‘Paying it Forward‘. He is also an ESRC Doctoral Training Partnership scholar studying Economics at Nuffield College, University of Oxford.
The economic recovery may be gathering pace, but we are not out of the woods yet. In our focus on how quickly demand will return to pre-crisis levels, it is easy to forget that many firms have spent the last six months piling on unprecedented levels of additional debt.
This is a double-edged sword: many have survived the worst of the crisis as a result, but there is a risk if ministers do not act that companies will spend the next few years paying down their liabilities rather than driving a dynamic recovery.
The coronavirus pandemic has meant that, both as a result of mandatory closures and lockdowns and due to voluntary public health precautions, people have been spending less and so businesses in almost all industries have been making less money. The unprecedented grant support from the Treasury, from the furlough scheme to tax payment holidays, has helped many businesses through the worst of the crisis. My new report for the thinktank Onward estimates that 350,000 businesses, employing five million people, would have faced a cash flow crisis in the absence of this government support.
But in addition to grant support the Government has provided what they call “liquidity support”: new debt that weighs down corporate balance sheets and that is mostly or entirely underwritten by the taxpayer. The CityUK’s Recapitalisation Group estimates that by March 2021 UK business will be holding £35 billion in coronavirus debt, accumulated in the space of a year. Even if the demand-side of the economy quickly recovers, this debt pile means that economic problems are far from over.
In fact, my report today estimates that nearly one in twenty firms are now technically insolvent as a result of losses and debt built up since March, and over one in five (21 per cent) could now be classified as so-called zombie firms, in that their operating profits at best only just cover their debt interest payments. There is a real risk that these companies spend the next few years worrying about how to make their repayments rather than investing in jobs and growth to spur the recovery.
Research published by the Bank of International Settlements, the OECD, and the NBER shows that zombie firms can harm investment, employment and productivity growth. Using this research, we estimate that the drag caused by the growth of zombie firms so far this year means that business investment will be lower by more than £40 billion annually and that productivity growth will be lower by by 0.39 percentage points – meaning missing GDP over five years equal to 1.9 per cent of current GDP, or over £500 per person in the UK.
Meanwhile the drag on employment suggests that unemployment will still be 6.4 per cent at the end of 2024, rather than the 5.1 per cent predicted by the OBR. This equates to an additional 400,000 unemployed in the year of the next general election.
To deal with this looming crisis, we propose a simple scheme, New Start, to allow firms to transfer their coronavirus debts into a long-term tax liability repaid out of profits—shifting payments to when firms are able to make them in the same manner as student loan repayments.
The benefit of the CBILS and BBLS, and to an extent the CJRS, is that they were designed in Whitehall but implemented by banks and businesses in the real world. The New Start Scheme keeps this flexibility as it can be run by the banks who have already issued the debts, and the scheme can run regardless of who owns, buys or sells the underlying asset.
The growth of corporate debt sounds like something that occurs in the balance sheets of City firms, but how it is dealt with will determine the strength of the recovery. The Chancellor has so far been reluctant to intervene in this debate, but this position cannot hold without the scarring effects of debt taking hold in the economy.