Coronavirus: business loans and the public finances

Chris Smith

Introduction

The Government has provided many forms of support to businesses and to households throughout the pandemic. In the autumn 2021 budget, it said that the package of assistance has been worth a total of £323 billion across 2020/21 and 2021/22.

Much of this support is direct cash transfers; for example, the coronavirus job retention scheme (the ‘furlough’), the self-employment support scheme, increased welfare benefits and cash grants to businesses. Their cost arises, and can be counted, at the time they are paid.

This article explores a further element of business support, whereby the Government has facilitated loans and other forms of cashflow support for companies. The amounts involved are large—more than £200 billion across the schemes considered in this article. Depending on the scheme, the immediate providers of financing have been either banks and private sector lenders, or public sector bodies such as the Bank of England and the British Business Bank. The Government has provided the lenders either with guarantees that they will be reimbursed if the loans default, or with a low-cost source of funds for onward lending.

The public finances take on at least some of the costs and risks associated with these schemes. However, their true cost will not be known until the loans are due to be repaid. In some cases, this is several years. But how much are they likely to cost the taxpayer, and, given the uncertainty, how have they been accounted for in current government finances?

Government loan and guarantee schemes and the public finances

The design of each support scheme affects both its possible cost to the taxpayer and how it is reflected in the public finances. This article focuses on the costs and how they are accounted for in the public finances. Links both in this section and in the ‘Read more’ section at the end of this article provide further information on the detailed design of each scheme.

Loans through private sector lenders

The Government has put in place four schemes that provide government guarantees to private sector lenders:

In each of the schemes, if the borrowing company does not repay the loan in full, the lender will receive compensation from the Government. The compensation will be either 100% of the amount not repaid (in the case of BBLS) or 80% (in the other three schemes). Therefore, if borrowers default, there will be a direct cost to the Government.

Size of the schemes

CBILS and CLBILS operated from 23 March 2020; BBLS launched on 4 May 2020. The three schemes closed on 31 March 2021. In total, they backed £79 billion of loans. However, only £72 billion of this was subject to the guarantee (because it is restricted to 80% of the loan amount in CBILS and CLBILS).

On 1 April 2021, these three schemes were replaced by RLS, which will operate until 30 June 2022. The Office for Budget Responsibility (OBR) estimated that RLS will cover loans worth £1.6 billion. The British Business Bank stated that £1.06 billion of RLS loans had been offered, with £823 million actually accessed, by 18 October 2021.

Expected losses

The OBR said the ultimate cost of these loans to the Government will depend on three factors:

the percentage of companies that do not pay back their loans in full (the “default rate”). This will include any losses in the scheme due to fraud;
for companies that default, the percentage of the loan they do not pay back (the “loss given default”); and
the proportion of lost loan repayments subject to the government guarantee—as described above, this is 100% for BBLS and 80% for the other schemes.

In September 2021, the Office for National Statistics (ONS) said that expected losses in the three closed schemes will be £20.9 billion in 2020/21. The OBR has said that the highest losses are expected to arise in the BBLS. This covers the largest amount of lending, has the highest estimated rates of default and loss given default, and also guarantees 100% of the loans.

For the RLS, the OBR forecast losses would be £0.53 billion, almost all of which would fall in 2021/22.

Estimates of losses from these schemes have fallen since the OBR’s previous estimates of March 2021. This mostly reflects lower than expected take-up of the loans and reduced forecasts of loss rates.

Treatment in public finances

The ONS ruled that expected losses in CBILS, CLBILS, BBLS and RLS should be recorded as public spending at the time that the loans were made. It said this expenditure would be categorised as capital spending (which is investment in public sector assets; for example, hospitals, schools and roads). Thus, expected losses for the first three schemes will be included within public sector net borrowing (PSNB) in 2020/21. For RLS they will appear in PSNB in 2021/22 and 2022/23. Expected losses would also add to public sector net financial liabilities (PSNFL).

The expected loss of £20.9 billion in CBILS, CLBILS and BBLS in 2020/21 was approximately 6.5% of total government borrowing of £319.9 billion. The £0.53 billion loss in RLS would be 0.3% of forecast total borrowing for 2021/22.

The ONS stated expected losses at the time of making the loans would not be recorded in public sector net debt (PSND), the usual measure of UK government debt. However, the guarantees would add to government debt when they are actually paid out. In that year, the OBR also expects there to be an adjustment to capital spending, and hence PSNB, to reflect the difference between the amount originally expected to be paid out and the actual losses realised.

The payback period for loans in the four schemes varies within and across schemes, with a maximum of 10 years. Therefore, to record expected losses at the time the loans are made requires estimates of unknown future losses. The OBR stated this gave rise to a high degree of uncertainty about the public finances in this area. It said that the actual cash cost of the schemes was only £1.4 billion to the end of September 2021. It described this as small in comparison to the expected write-offs.

In the autumn 2021 budget, the Government announced a new set of fiscal rules, which aim to keep public spending and the national debt sustainable. They include targets for government borrowing, debt, public sector investment spending and welfare expenditure. The costs of guarantees in the loan schemes impact on the Government’s ability to meet these rules. Mainly, they affect the debt target through costs as the guarantees are paid out in future years. The OBR’s estimates suggest that the largest effect is in 2022/23, when the loans will increase the debt by £12.6 billion, equivalent to 0.6% of overall debt on the measure used in the fiscal rules. The impact on the debt then drops to £1.2 billion in 2024/25 (0.05% of the forecast total) and below £1 billion per year thereafter.

Bank of England low-cost funding

In March 2020, the Government established the term funding scheme with additional incentives for small and medium-sized enterprises (TFSME). Under this, the Government, through the Bank of England, supplied funds to banks and other lenders at a reduced rate of interest. The aim was that banks would increase their lending to households and businesses, but particularly SMEs, at lower rates than would otherwise be available. The TFSME closed to new applications on 30 October 2021.

The Bank of England said that there was £89.1 billion of loans outstanding (ie not yet repaid) under the TFSME as at 30 June 2021. The scheme provides reduced price funding for lenders but does not give them any guarantees, so business losses will not be passed on to government unless the bank itself defaults. The Office for Budget Responsibility described this possibility as “remote”. It therefore estimated the impact of the scheme on public spending to be nil.

However, TFSME does impact on the public finances because the Government provides the initial financing, which is then due to be paid back in future years. These payments are classified as ‘financial transactions’. Because they are expected to be repaid, they do not add to the annual deficit. However, until they are repaid they do affect the overall measure of public sector net debt.

The OBR publishes forecasts of the size of this impact, but in these the TFSME is combined with an earlier scheme, the term funding scheme (TFS). This operated in a similar way to TFSME but without added incentives to lend to SMEs. It was established in 2016 and closed to new loans in 2018. The OBR expects TFS and TFSME together to add £180 billion to the debt by 2022/23, equivalent to 7.3% of forecast total debt. Conversely, repayments will act to reduce the debt from 2024/25 onwards.

The OBR also publishes a second measure of debt, excluding TFS/TFSME. The differences are marked. For example, on the headline measure, debt is forecast to peak at 98% of gross domestic product (GDP) in 2022/23. On the measure excluding TFS/TFSME, it peaked at 86% in 2020/21. The second measure is that used in the new fiscal rules, referred to above.

Bank of England purchases of corporate debt

The covid corporate financing facility (CCFF) was a support scheme under which the Bank of England purchased corporate debt. It opened in March 2020 and closed on 31 March 2021.

The Bank purchased over £37 billion of debt under the CCFF. However, most of this has already been redeemed. £2.2 billion remained outstanding as at 1 December 2021.

HM Treasury ultimately bears the risk of companies defaulting on the debt. However, the CCFF was only available to “fundamentally strong” companies with an investment grade credit rating. As a result, the OBR said that “write-offs are expected to be minimal”.

Any losses that do occur under this scheme will be accounted for when the defaults occur, not as an expected number when the loans are made. The ONS said the exact way in which any losses would affect the public finances would be determined at the time, on a case-by-case basis. It also stated that, because the CCFF creates assets and liabilities of the same value on the government balance sheet, it does not affect the government deficit or debt.

Future fund

The future fund provided government loans, alongside private finance, to “innovative UK companies with good potential”. It launched on 20 May 2020 and closed to new applicants on 31 January 2021.

The OBR said that the future fund was the only scheme that involved up-front outlays from the Government (via the British Business Bank). Loans under the future fund convert to equity if not repaid, in which case the Government would become a part-owner of the business. The value of the Government’s equity stake may be different to that of the original loan—possibly lower, but also, potentially, higher.

There were £1.1 billion of loans under the future fund. In October 2021, the OBR said its estimate of eventual net losses was £0.5 billion, but that “only a very small number of losses have so far crystallised”.

The ONS said that, like the TFS (as described above), future fund loans and repayments are treated as financial transactions. Therefore, they do not affect public sector net borrowing at the point of lending but they do initially increase public sector net debt. The ONS stated that where the loan converted to government equity, the way in which it would affect the public finances would be determined at that time and on a case-by-case basis.

Interest on the loans is treated as government revenue. The ONS said it raised approximately £100 million in 2020/21.

Trade credit insurance

Trade credit insurers provide cover to businesses trading internationally to protect them against an overseas buyer defaulting on a payment owed. One of the Government’s support schemes provided £10 billion of reinsurance cover to these insurers, to ensure that coverage continues through the pandemic.

The Government would cover 90% of claims, and insurers the remaining 10%. Therefore, any event giving rise to a claim would affect the public finances. The ONS has said that these claims will be treated as contingent liabilities in the public finances. It stated that any losses would be recorded as spending at the time that the claims on the government are made.

The OBR’s fiscal forecasts contain an estimate of losses to the Government under this scheme. However, the OBR believes it is small enough to potentially breach confidentiality requirements, while not being material to the overall fiscal forecast. Therefore, it is not disclosed in the OBR’s Economic and Fiscal Outlook.