‘The worst recession since 1709.’ This phrase has characterised much of the post-Covid-19 economic analysis. However, the area of government policy most praised, in stark contrast to other areas of its pandemic response, has been Rishi Sunak’s economic package. The Coronavirus Job Retention Scheme has provided support for 25% of the British workforce and maintained workers’ links to their pre-pandemic jobs. This has been favourably compared to other countries like the USA where the employee-employer link has been severed for millions.
However, with Mr Sunak announcing the scheme’s roll back, which will see businesses incrementally take over the responsibilities of supporting their staff, and its eventual closure at the end of October, our minds must turn to the future. There is the immediate future of the rest of this year and there is the medium and long-term future as we build a new economy and a new society.
I say, ‘build’ and not, ‘rebuild’ and stress how this must be, ‘new’ because the old model of private corporate finance simply cannot continue. This is a system that perpetuates regional inequalities, that is fixated solely on short-term profitability and gives governments little to no dynamic control over the nation’s industrial strategy.
At the moment, the government is clearly reluctant to open future economic policy up to debate. Indeed, in front of the Liaison Committee on May 27th, the Prime Minister said to Mel Stride MP (Conservative Chair of the Treasury Select Committee), ‘I don’t want to anticipate now what we’re going to do on our economic package.’
Others are willing to consider what, ‘economic package’ is right for Britain now and in the future, even if Mr Johnson is not, and a consensus is emerging around the need for large-scale equity-style investment. This will require new, strong, state-backed institutions to transform the world of corporate finance.
Why equity investment?
Currently, government has focused on supplying easy-to-access liquidity for businesses through the CBILs and the Bounce Back Loan Scheme. This funding, alongside the furlough scheme, was vital for many SMEs to keep their heads above water when the merciless pandemic threaten to suck profits and livelihoods into the abyss of recession. However, many, both inside and outside No11, are recognising that the initial, ‘crisis of liquidity’ is, ‘morphing into a crisis of solvency’ in the words of Giles Wilkes, a Senior Fellow at the Institute for Government in his recent paper.
As Wilkes makes clear in this paper, it is simply unsustainable, and could potentially lead to huge economic scarring if many businesses fail, for the government response to be based on loans. Uncertainty, a radically new business environment, a deep recession and a sustained demand slump will mean that many won’t be able to service their loans and will collapse under, what the Treasury has recognised is a mounting, ‘debt burden’.
Government must shift to a different kind of financial support in the form of equity investment. Equity is the value of business/property when all debts and liabilities have been paid, so this investment will involve the state taking partial ownership of larger businesses and providing profit-contingent repayable grants for small businesses. At the moment, government schemes are increasing businesses’ debts which could drag many under or significantly hold them back in the difficult trading circumstances to come. When businesses are facing insolvency, they cannot take on more debt, so the government cannot continue to provide support through loans, however appealing the rates.
Equity-style financing is most common for start-up businesses entering very uncertain markets but with the potential for profitability. The ERP Venture Capital Fund and the High-Tech Gruenderfonds are good examples from the German National Investment Bank. The easiest way to think about large-scale equity financing in the current and coming climate is to think of British SMEs emerging from lockdown into similarly uncertain markets. Understandably, businesses are usually uncomfortable with the idea of state equity, but, when many will be stuck between insolvency and an ever-rising debt mountain, the state must do all it can to offer support to help businesses adapt and stabilise to protect jobs and wealth nationwide.
The idea of equity-style investment is already in the minds of those as powerful as the Governor of the Bank of England; Andrew Bailey, recognised, on the 17th of April, that businesses would begin to need equity not loans as the crisis continues.
Why a National Investment Bank?
But why is a new, potentially revolutionary, institution like a National Investment Bank needed? Why not use existing institutions like the British Business Bank?
The simple answer is the BBB is far too small for the task at hand and not dynamic enough. It was set up in 2014 with initially just £1bn of government funding and was never intended to grow to the size of the Germany KfW, now with a balance sheet of half a trillion euros. It was instead to serve as an intermediary between private finance and British businesses. Wilkes says the BBB, ‘operates within a typical Treasury framework seeking out market failures and encouraging private sector finance to fill identified gaps- not to accumulate a massive balance sheet.’
The issue here is that, ‘private sector finance’ will likely be reluctant to expose itself to the uncertainties of the coming recession and the likely frailty of many businesses. Additionally, questions should be asked about whether the current system, of which the BBB is a part, inhibits the adequate funding of British SMEs; in 2018 there was a difference of £59bn between money SMEs applied for and the actual loans agreed by private banks. Clearly, a prudent banking system cannot approve all loans to all businesses, but this appears to be a substantial shortfall.
There has never been a time when rapid investment in corporate Britain is needed more than now, but the country lacks the strong institution to carry this out. The BBB was never designed to operate on this scale or to hold large amounts of equity, so it is unfair to expect it to meet the current challenge.
The Labour Party’s plan in 2017 was to set up a National Investment Bank and Regional Development Banks with initial government funding of £20bn and the aim of building a balance sheet worth £250bn in 10 years. Undoubtedly, the initial investment in the current situation would need to be far greater due to scale of the economic tsunami facing Britain’s shores, but, given the extraordinary actions already taken by the Treasury, the scale of necessary initial investment shouldn’t be a limiting factor.
Upfront costs pose even less of an obstacle if one considers the long-term benefits and revolutionary potential of a National Investment Bank. Whilst this current crisis could provide the impetus for this Conservative Government to establish a National Investment Bank out of necessity, it is clear that, to fully realise such an institution’s potential, a Labour Government will be necessary.
A Labour National Investment Bank
In the hands of the Conservatives, state-led investment will continue to be small scale and operate within the constraints of the Treasury mindset limited by the attitudes of private corporate finance. Currently, the BBB identifies market failure fires when SMEs aren’t getting investment and hopes private finance will arrive to put them out; what we need instead is a National Investment Bank which leads on fire prevention and makes our collective home, this country, more resilient and more prosperous.
Through a program of equity investment which this crisis necessitates, a National Investment Bank will rapidly acquire ownership of substantial chunks of large businesses and what Wilkes calls, ‘silent equity holding’ in small businesses via profit-contingent repayable grants; the natural inclination amongst Conservatives will be to sell this equity off. Jim O’Neill, former Conservative Treasury Minister made this clear saying, ‘You convert into preferred equity on the assumption that some of these companies will have a good future, then flog them- à la Margaret Thatcher -over time.’
With a Labour government, this cannot be the model. In 2017, John McDonnell set out his vision of a Labour National Investment Bank that could, ‘act as a holding company’ meaning it could own the stock of other companies. Based on this principle, a Labour-led National Investment Bank could retain a large portion of the balance sheet accrued during this crisis and could become self-sufficient through rapid reinvestment.
A strong British National Investment Bank would drastically change corporate finance giving government active stakes in crucial industries enabling a rapid shift towards green working and to aid an, ‘industrial strategy and economic policy intended to permanently reshape the British economy so that it is fairer, more democratic and less wasteful of resources.’
This National Investment Bank would rapidly invest in Britain’s undercapitalised SMEs triggering growth and supporting innovation. The Labour plan for subsidiary Regional Development Banks would also ensure that capital would be as available in Liverpool as it is in London and as available in post-industrial areas like Stoke-on-Trent as it is in trendy suburbs like Shoreditch. And for our dilapidated and systematically starved local authorities, a bank of this kind could provide finance for local projects to improve our communities.
The current system of private corporate finance is obsessed with short-term profit and prioritises already wealthy areas to guarantee short-term returns. A National Investment Bank would see beyond the blinkers of private investment banking and would emphasise long-term growth and productivity, social infrastructure and environmental sustainability.
This new institution also directly addresses two of the key concerns of voters in the now-‘Blue Wall’ seats found to be looking for immediate investment in their areas and fairness, rather than what are seen as punitive taxes on the wealthy. Whilst a Labour government should redress imbalances created by Conservative tax cuts and eliminate unfair loopholes in order to properly fund our public services, this cannot be seen to be in opposition to wealth. Labour has never been opposed to wealth creation. The party has fought against wealth accumulation by individuals to the detriment of society. Labour will always seek to develop and democratise a certain type of wealth: commonwealth.
A National Investment Bank would not be a panacea. It would be a complex institution needing competent and reliable leadership from government. However, it would be a suitably monumental legacy to what is likely to be a monumental episode in our nation’s modern history. It is the institution that could deliver the large-scale equity-style investment that is beginning to seem necessary stave off deep economic scarring now, but it would be more permanent than the Treasury’s ‘Project Birch’ scheme and it could end up doing more than just preventing scarring; it could enduringly strengthen the British economy and could help fuel genuine, nationwide growth.
Glenn Armstrong is 18 years old and has just finished school. He intends to study History and Politics at Oxford University. More of his writing can be found at https://humanifestogroup.wordpress.com/‘.
He tweets @gpsarmstrong