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Summary
- The benefits being extended to private businesses out of taxpayers’ money, also puts the government on the dock to justify why such a benefit was extended.
- The recent decision of the government to refuse bailout to some companies while softening rules to extend to others has raised several questions about what criteria the government is using to extend or refuse those loans.
- There have been many companies in the recent past ranging from airline companies to utility companies that were forced to close for want of government support.
The recent British government decision to find ways of extending COVID- 19 business loans to businesses who have the backing of large Private Equity investors is drawing a lot of flak. Most of these companies which have a significant amount of debt on their books had previously been eligible for the government stimulus loans rolled out in the month of March. However, a recent EU softening of stand on the issue of state aid to such companies has made it possible for the government to extend the benefit of its stimulus loan schemes to these companies as well. There are now many, who are asking how justified the government’s move is when it had refused bailouts to companies like Virgin Atlantic and Jaguar Land Rover who make a far more significant contribution to the British economy than these companies. They warned that at some point, the government would have to justify the decisions to the general public, which may not hold out well for the ruling parties future electoral prospects.
The case for deserving and undeserving businesses accessing public funds
It is worth noting here that not Just Virgin Atlantic and the Jaguar Land Rover but there have been several British companies who have knocked at the doors of the British government for a bailout. Some of these companies, which are large employers and created significant value for the British economy, were left to die, chiefly among them are Thomas cook Plc and Flybe. Many observers had then pointed out that these companies were poorly managed and had significant debts on their books which prompted the government not to lend support. However, taking the same analogy, most of the PE-backed companies whom the government seeks to extend support also have massive debts on their books and pay a reduced tax bill because of that. So what is the yardstick that the government is using to differentiate between the deserving and the undeserving?
The reasoning that the government had while rolling out its COVID- 19 stimulus packages in the month of March was to protect people from losing their jobs and small and medium-sized companies from going bankrupt. In that regard most of these PE-Backed companies have already benefited by putting their employees under the furloughing scheme, hence seeking further government loans when they have strong investor backing, certainly would not seem justified to many.
The possibility of the UK softening Covid- 19 loans to PE-owned companies
The United Kingdom is bound by the rules of the European Union regulations until 31 December 2020. These rules have certain stipulations regarding state help to companies in the EU region to promote healthy competition between countries of different origins. In the aftermath of the coronavirus pandemic, however, the situation across the continent became very precarious. The situation necessitated that each national government take measures to protect businesses in their countries and stop their economies from sliding into recession to the best of their abilities. The EU rules thus need to be made flexible to allow the national governments such leverage. In the month of July when finally, there was some softening from the EU policymakers, administrators in the UK breathed a sigh of relief. A significant number of companies in the country were not able to fully benefit from the government COVID- 19 stimulus packages because of the regulations, and their businesses were at a heightened risk of failure and their employees of losing their jobs. The overwhelming consideration thus, in the government's reasoning is that nobody is left out from benefiting from the stimulus packages for which they may be eligible. So whether to make PE backing of a company an ineligibility criterion is something the government has to decide upon
The current state of public debts in the UK
The government has taken massive debts in the past few months to support the different stimulus programmes that it announced to support business in the country’s fight against the adverse trading conditions resulting out of the coronavirus pandemic. The current unemployment level in the country is at 3.9 per cent, and the public debt levels are expected to reach as high as £370 billion by the end of this year. These debt levels are clearly very high, and any further increase could very well make them unsustainable. The Office of Budget responsibility has in its recent report stated that the government needs to raise its tax rates and expand its tax base significantly to raise £60 billion in taxes over the next ten years if it wants to retire off this massive debt load. Thus, the government has its work cut out to reduce its public debt levels and would do good if it withdraws some of the stimulus packages in a progressive manner.
To sum up, rising debt and rising bad debt will be a very toxic combination that the government should do its best not to accumulate. In the case of extending loans to companies which have strong PE support, extreme caution needs to be exercised to determine if these businesses are true to the public interest of the British economy and deserve public funding support. The greater public good should always be the overriding consideration while making a decision on public spending. Of course, consideration must also be given to the affordability of this scheme viz-a-viz the government’s debt levels.
