Massive corporate debt could hamper the pandemic recovery. Here’s how we could deal with it
Will Tanner puts forward a suggestion for tackling UK companies’ rising corporate debt in the wake of the pandemic.
The paradox of the pandemic is that everything we have done to support our economy through the crisis may inadvertently hamper our recovery out of it.
Since March, the Treasury has gone to unprecedented lengths to keep companies’ heads above water, extending more than £50bn in loans to private companies through its various loan schemes. A further £35bn has underwritten the wage costs of 1.2m firms.
This action has saved an enormous number of companies. A big data analysis of thousands of company balance sheets published by Onward yesterday estimated that one in ten firms (12 per cent) would have faced a cash flow crisis had they not had exchequer help. That is 350,000 firms who collectively employ 5m people.
But those billions of pounds worth of loans will have to be paid back, at exactly the time we want firms to invest in growth, jobs and productivity-enhancing technology to spur the recovery. The risk is that we have a repeat of 2008, when excessive corporate debt dragged on the recovery and left productivity in a slumber from which it is yet to wake.
Modelling data to August, we find that one in five firms (21 per cent) is now a “zombie firm” because of rising corporate debt since lockdown, meaning its profits at best only cover its debt interest payments and at worst do not even cover those liabilities.
A large body of research from the Bank of International Settlements, among others, shows the deleterious effects such firms can have on a country’s growth, by locking out resources, reducing prices and pushing up wages for more viable and dynamic businesses.
Worse than the rise of zombies is the fact that one in twenty UK firms now has so much debt on their balance sheet that their assets no longer cover their liabilities, rendering them technically insolvent. These firms collectively employ 1.8m people.
So far, the government has been unwilling to contemplate stepping in to help these companies restructure or manage their debts, despite growing calls for the city. That is understandable, for now: as long as taxpayer-funded loan schemes are open, it makes little sense to invite fraud or deadweight by talking up different kinds of forgiveness.
But soon the Treasury is going to have to grapple with rising levels of corporate debt. When it does, it should consider turning debts into a long-term tax liability, an idea put forward in various forms by Onward, the Institute of Directors, the Federation of Small Businesses and TheCityUK.
The virtue of such a scheme is its simplicity. Just as with student loans, firms would only stay paying back their government-issued loans when they returned to profitability, allowing them to prioritise growth and jobs over balance sheet deleveraging.
Given there is no swap to equity or formal debt restructuring, it could be managed simply through the existing bank network instead of a new body or network. And firms could choose to take part, or carry on paying back their loans as agreed previously.
The Treasury has already shown itself capable of nimble, far-sighted schemes to help the economy weather the shock of coronavirus. In the coming months, it will have to do so again, to head off the real risk of a slow and debt-laden recovery.
Will Tanner is director of Onward and former deputy head of policy in No.10 Downing Street