Government Loan and Job Programmes – Avoiding Mass Liquidations in the UK and the US

Whilst there are fascinating differences between the UK and US governments’ approach to the covid business lending programmes (or should I say programs?) – the key policy idea is to avoid mass liquidations of businesses that would otherwise be viable but for the pandemic. The US government is making a clear attempt to encourage borrowers in these programmes to retain staff. The UK includes no employee retention requirements.

In the UK the larger loan programmes (called CLBILS, CBILs) will be made by accredited lenders and the government will guarantee up to 80% of the loans. In the US the government will set up an SPV to fund the Main Street Lending Program which will then buy the majority of the loans from eligible lenders leaving  the original lender with a risk retention portion (between 5-15% depending on the type of programme).

In the US (and not under the UK programme) there is a requirement to make reasonable efforts to keep employees employed.

Both countries have created a programme for SMEs, in the US the Paycheck Protection Programme (PPP), in the UK, the Bounce Back Loan (BBL). 

The Paycheck Loan can be converted into a grant if at least 75 percent of the PPP loan is used to fund payroll and employee benefits costs. The remaining 25 percent can be spent on mortgage interest payments, rent and lease payment, and utilities. There is no equivalent conversion feature for the BBL so for now at least the loan is a liability to be paid back.  There is a big question in my mind as to whether the UK government will continue to insist on repayment in the long term of all BBLs. In the US a toggle from a loan to a grant in the Paycheck Loan programme is generous and hopefully will allow many companies to survive as the lockdown relaxes.

The lack of emphasis on employment retention in the UK loan schemes can be explained as the government has introduced a Job Retention Scheme, with no connection to the loan programmes, which allows employees to furlough employees. The government will pay up to 80% of incomes up to an average salary of GBP2.5 k a month. It has meant far fewer people formally becoming jobless compared to the USA at least in the short term. The take up and implementation has been impressively quick and smooth.

US unemployment figures which came out last week were dreadful 42.9 m unemployed / underemployed. 14.7% of the working population – the highest since data started being collected in 1948. In the UK it is estimated that 6 - 9 m workers have been placed on the Job Retention Scheme which in theory ends in June but the government is considering an extension and adjustments. 

The furlough scheme is extremely expensive and is likely to be temporary. Long term joblessness is the scourge both governments are working hard to avoid and the loan programmes are helping to ensure that we do not see an immediate mass of liquidations. In my view the next step for the UK government should be to take a leaf out of the German government’s playbook to allow furloughed workers to start working. At the moment the Job Retention Scheme is not doing anything to help the underlying business.  The furlough scheme needs to help businesses as they emerge into a more difficult business environment.   

Both governments are making extraordinary efforts to avoid mass liquidations of otherwise viable companies and consequent mass unemployment. Our recent forebears had to live in  the Hoovervilles and they marched on the Jarrow Marches -  let’s hope these schemes ensure mass unemployment remain in our economic history, and do not infest our present.