The government should triple the amount of equity funding available through the British Business Bank, British Growth Fund and Future Fund to £30bn, argues thinktank Onward.
Only by tripling the amount of equity government injects into high-growth businesses can Britain avert an inevitable collapse of firms unable to repay emergency coronavirus debt.
Traditionally businesses find it difficult to raise capital that doesn’t mean taking on more debt. Currently, all three organisations have £10bn of dry powder cash between them.
In particular, the British Growth Fund could be charged with running a UK sovereign wealth fund to manage emergency coronavirus loans taken out during the Covid-19 crisis, as well as invest directly in high-growth businesses.
The Onward report Bounce back paints an apocalyptic picture if the government sits back and does nothing.
Its six authors have all held senior positions in previous Conservative administrations. They include Adam Memon, former head of economic policy for ex-chancellor Sajid Javid; Neil O’Brien MP, former economic advisor to chancellor George Osborne; and Tim Pitt, former senior adviser to chancellor Philip Hammond.
The authors point out that UK companies went into the coronavirus crisis with historic levels of debt, which is rising sharply. And that excessive debt will stymie any bounce back as businesses try to pay off existing borrowing rather than investing in businesses.
The sums involved are eye-watering. Currently, the government alone has lent £39bn to businesses blighted by coronavirus. This includes £10.5bn through the coronavirus business interruption loan scheme and £28.1bn through the bounce-back loan scheme.
Ninety per cent of businesses are borrowing more, with the banks lending £30bn to firms in March alone, up from an average of just over £1bn per month over the past three years.
And the government is expected to eventually spend £240bn – around 12 per cent of GDP – on cushioning the effect of the crisis.
But taxpayers are exposed to an overwhelming amount of default or bad debt as and when businesses go bust.
One recent survey found that 43 per cent of business that have borrowed government money do not expect to repay it, either because they expect to have gone bust or they do not believe the authorities will chase the debt.
If the 43 per cent figure proves broadly correct, that would mean an estimated £16.8bn of bad debt has already been accumulated. TheCityUK estimates that will rise to £32-£36bn of unsustainable debt owed to the government by March 2021. Far better, say the report authors, that this bad debt be converted into equity through convertible loan notes or even written off completely.