Treasury ‘risks wasting money’ by allowing Covid schemes to cushion Brexit

IfG urges Rishi Sunak to avoid propping up companies that will not survive EU exit with pandemic aid
The lockdown has forced shops, hospitality and leisure businesses to close. Photo: David Davies/PA Wire/PA Images

By Jim Dunton

06 Jan 2021

The Institute for Government has warned that ministers are likely to waste public money and damage the economy if they shy away from properly tailoring business support packages to the twin challenges of Covid-19 and Brexit.

In its latest report, the think tank said there were already signs the government was going to allow Covid schemes to “cushion” Brexit disruption,  but cautioned that chancellor Rishi Sunak and the Treasury should instead create separate support packages.

The Brexit and coronavirus: Economic impacts and policy response paper, by Gemma Tetlow and Thomas Pope, says the government should restrict access to coronavirus support schemes to businesses affected by the pandemic, rather than those adjusting to Brexit changes.

It says ministers would never have introduced support programmes as generous as those created in response to Covid-19 for Brexit disruption, and failing to properly target aid will slow some businesses’ adaptation to the UK’s new relationship with the European Union.

Tetlow, who is the IfG’s chief economist, said restricting access to the Coronavirus Job Retention Scheme, or even closing it earlier than its scheduled April 30 end, would be one option.

Other options would include requiring firms to demonstrate trading had suffered as a result of coronavirus before approving aid, or requiring all new applications for support to be decided on a case-by-case basis.

“Schemes designed for short-term Brexit disruption should include government-backed loans – ideally on less generous terms than for coronavirus, although it may be quicker and easier simply to extend those existing schemes – and further tax deferrals,” Tetlow said.

“More bespoke intervention akin to that planned under ‘Operation Kingfisher’ in the event of no deal in 2019 may also be appropriate.”

Tetlow said that because there were few restrictions on which businesses could apply for the ongoing coronavirus support packages, there was a danger they could be used to “prop up” firms that would not be profitable once the threat of Covid-19 receded.

“To the extent that the schemes are used in that way, they will provide poor value for money,” she said.

“The fact that a third fewer businesses failed in 2020 than in 2019 provides some evidence that these policies are indeed propping up businesses that would have failed in more normal times.

“The size of any deadweight cost should be limited by the fact that most of the effects of Covid-19 are likely to be short term, rather than permanent.”

The IfG report cited research that said while 69% of the UK economy was badly affected by Covid or Brexit, only 3% of that GDP related to sectors that were “relatively badly affected” by both Covid and Brexit.

Those sectors included machinery and equipment and transport equipment. Conversely, public administration; agriculture and fishing; and technical and scientific services were all described as being “relatively unaffected” by Covid and Brexit, in economic terms at least.

The IfG’s paper was published ahead of prime minister Boris Johnson’s announcement of a new national lockdown for England on Monday.

This week, Sunak announced the government would provide one-off top up grants for retail, hospitality and leisure businesses worth up to £9,000 per property to help businesses through to the spring against the backdrop of the new lockdown.

Sunak’s updated aid package also included a £594m discretionary fund to support other impacted businesses.

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