The UK is already entering a deep recession. The Chancellor has made a good start with a policy he has described as timely, targeted and temporary. This policy is, however, still too timid and needs to be titanic in scale. So far so good, but far more needs to be done.
The UK faces a health crisis, along with an economic and financial crisis. It also faces a communication challenge, as well.
In terms of the financial markets, equities, bonds and sterling are all falling. In part this reflects the openness of the UK economy and that many assets are foreign owned. During this global financial crisis, selling UK assets is providing international investors much needed liquidity. Also, the sell-off may reflect the need for the UK to communicate better its approach, overcoming misplaced fears. Actions also need to back-up those words. In terms of monetary and financial policy, the latest rate cut to 0.1pc was welcome.
We would advocate cutting policy rates to zero and the Bank of England announcing it will target and keep 10-year yields at zero, over a minimum period of at least two years. This would be beneficial for the real economy, and even though pension funds may be initially concerned, its impact in helping stabilise the economy should be the main focus and ultimately be of benefit to them. The Bank should also expand its balance sheet, printing money. Also, prudential measures may need to be relaxed further.
The core of the financial system is safe. Banks are well capitalised. Yet banks need to be incentivised and encouraged to provide assistance to firms and not at prohibitive rates.
This ties in with the whole-of-government approach. The Chancellor spoke of providing funds to the NHS, helping firms and people. It is in terms of the latter, help to individuals, that far more is needed. Measures have been announced to help minimise outgoings, such as mortgage holidays. But many people will not have an income in the next three months or so. The measures announced in the Budget did not go far enough. Statutory sick pay of £94.25 per week is too low. Increased access of the self-employed to the Employment Support Allowance and Universal Credit is too complex and again not providing enough money.
The Americans have shown what needs to be done, sending cheques to everyone. We should do the same. It is not targeted, but speed is of the essence. A £1,000 cheque to every adult, each month, for the next three months would allow people to pay their rent and buy groceries. It could cost about 7pc of GDP. This is costly but manageable and better than the alternative. It would also allow the economy to be in far better shape to rebound once this phase of the crisis has passed.
In the last two hundred years, the three military wars the UK has fought have seen debt to GDP rise sharply, from 100pc to 150pc in the Napoleonic War, to 110pc in the First World War and to 250pc after the Second World War. Our debt to GDP is now 80pc. This health and economic war will result in it rising sharply.
The Chancellor's lending facility of £330bn was impressive. There have, however, been too many stories since then that the execution is lacking, with access denied to non-investment grade firms. That threshold should be abolished. If the Government prefers to make loans to firms then these should be available to all businesses that wanted them, large or small.
These could be over, say, a five-year period, and the firm could repay them as and when it chose. Of the 5.9m private businesses in the UK, no fewer than 4.5m have no employees. They are sole proprietors, and could be excluded from the scheme, provided the safety net mentioned above is in place for individuals.
Ensuring access to funds for the other small firms that employ staff is essential. There will be some losses as some firms may game the system. It is not possible to give a definitive estimate of this, but on any reasonable reckoning they would be small. If the funds are not repaid fully after five years, then the repayment period could be extended, or the stake becomes an equity stake. The UK's flexible labour market leaves it vulnerable to a surge in unemployment: 20pc was reached in the Depression. We must avoid large-scale job layoffs before it is too late.
The UK entered this crisis as an unbalanced economy. Hence the policy focus on levelling up. That needs to continue. It is essential, as well, to ensure this temporary hit to the economy does not cause permanent damage, especially to the many areas that are first rate and world class, whether in the creative or service sector or across industry itself.
To put a firm floor under such firms, not only should government lending be extended but, as seen in Japan, the central bank should use its balance sheet to buy equities, exchange traded funds, and UK assets that are cheap and that will rebound. It could be the seed of a UK sovereign wealth fund. It could be started easily and cheaply, and show a sign of confidence in UK plc for the future. This whole-of-government approach can address immediate challenges while laying the framework for a healthy economic recovery.
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