The second lockdown risks an insolvency tsunami
Thousands of businesses across England will remain shuttered today as the new month-long coronavirus lockdown takes effect. Citing new scientific evidence showing an expected surge in cases nationwide over the coming weeks, the Government finally bowed to pressure and abandoned its previous regional tiering strategy last weekend.
Critics argue that a sharp ‘circuit breaker’ lockdown at an earlier stage – as pursued in Wales and Northern Ireland – may have prevented the need for such a draconian step. Now, firms in the hospitality, leisure, retail and other sectors face an enforced closure at what would normally be a critical time in the build-up to Christmas, depriving them of vital sales at the tail-end of a truly dreadful year.
The Chancellor has pledged to reinstate the full ‘furlough’ Job Retention Scheme (CJRS) at the 80%-of-wages seen in the spring for the period up until December 2, and raised grants to self-employed people under the Self Employment Income Support Scheme (SEISS) to a similar level. In addition, grants of up to £3,000 per month are available for firms forced to close due to lockdown.
Nevertheless, there is mounting evidence that many thousands of firms are facing death by a thousand cuts. For firms that qualified for financial support over the past nine months, it’s because this simply hasn’t been enough to make up for the dramatic collapse in demand that has hit sales hard and demolished their reserves. Meanwhile, around three million early-stage or part-time entrepreneurs, freelancers and limited company directors continue to be scandalously excluded from the packages on offer, as recently confirmed by the National Audit Office.
The big fear now is that the slow-bleed is about to turn into a haemorrhage of insolvencies.
Looking at the Wave 14 of the ONS Business Interruption Covid-19 Survey (BICS) data covering the period up to October 4th, we can see that, in around 14% of firms, operating costs are exceeding turnover (with a further 25% worryingly ‘not sure’). This translates to around 200,000 firms across the UK based on the latest BEIS Business Population Estimates (BPE).
Even more businesses are worried their fast-depleting cash reserves will soon run dry. Across the UK as a whole, 24% of firms currently have no reserves or think they’ll run out by the end of 2020. Should that come to pass, we estimate that a staggering 340,000 firms and as many as 4.9m jobs nationally could be at risk across the private sector.
The impact could be especially hard on the nations and regions of the UK. In the West Midlands, for instance, this would equate to around 26,000 firms and 375,000 jobs. This is in a region where the number of firms scaling or achieving high growth episodes and whose levels of innovation and productivity have historically lagged behind. Such an order of mass insolvencies and business failure will take years to recover from. It simply drives a coach and horses through any attempt to ‘level up’.
As if these statistics weren’t depressing enough for the firms concerned and the immediate health of the UK economy, we should also be worried about future business dynamism. This depends on a whole host of factors, but it would be unsurprising if we see fewer entrepreneurs starting businesses in an environment of continued weak demand – and where government support for new starts is negligible.
Self-employment has fallen sharply although there is some evidence from incorporation data that start-ups in recent months are at a level higher than the comparable period in 2019. We know from GEM UK data from the Great Financial Crisis (GFC) of 2008-09 that the majority of these will be categorised as ‘necessity entrepreneurship’ and may be less durable in the marketplace. That feeds into the whole chain of firm growth and job creation, as we know from the period following the GFC that new firms were absolutely critical for creating jobs in the recovery period.
But there are other implications too. We know from recent ERC research that as many as two-thirds of Innovate UK grant recipients have scaled back or completely cut their research and development (R&D) budgets in the wake of Covid-19. There’s a strong connection between innovation – the development of new products, services and processes – growth (often through exporting) and productivity increases.
So failure to provide adequate support for business in its hour of greatest need – or being highly selective about which parts of the business ecosystem you do support – is a false economy that ultimately leads to lower dynamism in the longer term.
With the end of the Brexit transition period fast approaching – and a ‘deal’, even if it materialises, that is likely to be a pale shadow of our current trading arrangements with the EU – now is the worst possible time to be short-changing the SMEs that form the bedrock of enterprise in communities across the land.
Instead of announcing short-term tweaks to the support available, the Government must now come back with a bolder vision that supports all of the entrepreneurs and firms that will be so vital to our recovery. One that finally recognises that this won’t all be over by Christmas and gives us hope for future renewal.
Professor Mark Hart, Deputy Director, ERC
Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the
Enterprise Research Centre, its Funders or Advisory Group
