Support for businesses
In a paper by the Institute for Public Policy Research and Common Wealth thinktanks, George Dibb et al propose that the state should take equity shares in private companies needing support through the pandemic.
Bank of England figures show that, as a result of existing government loan support schemes, small and medium size firms took on 40 times as much debt in the first ten months of 2020 as in previous years. The authors argue this debt burden will lead to bankruptcy in many firms. They believe that for companies that survive, the need to repay the debt will impact cashflow and could reduce investment.
The authors suggest that public equity stakes in companies that would be viable but for the pandemic could be a possible solution. In contrast to debt, the authors say that equity can “better absorb losses, reduce leverage and in turn give other investors certainty around the long-term viability of a firm”. Moreover, they claim that such investments could provide returns to taxpayers in the longer term. They cite Lloyd’s Bank, bailed out during the 2008 crisis, where the state’s share was eventually sold at a profit.
The authors suggest that new institutions, such as a citizens’ wealth fund and a national investment bank, would be required to administer such public equity stakes. They argue these bodies could ensure that the equity stakes are used to promote good practice in firms; for example, in pay, training and environmental behaviour. However, they state the new bodies should avoid “political influence”.
The authors quote comments from the International Monetary Fund, the Bank of England and the Trades Union Congress as potentially supporting the idea. They also refer to existing examples of similar schemes on the continent. They estimate the cost of the suggested programme at £45 billion, which, the authors report, is less than half that of a comparable scheme in Germany. They conclude this investment would be worthwhile, as it could “help save hundreds of thousands of jobs […] and the associated income in firms currently at risk”.
Read the full article: George Dibb et al, Taking a stake: public equity for economic recovery and industrial strategy, Institute for Public Policy Research and Common Wealth, 15 December 2020