Paying it forward

This report from UK think tank Onward looks at how to stop corporate debt killing off the recovery.

The report, which uses data from the ONS Business Impact of Covid-19 Survey alongside a large sample of firm-level data, finds that nearly one in twenty firms (4.3%) is likely to be pushed into technical insolvency due to the levels of debt they have already built up since March. If they can continue to meet their day-to-day commitments these firms will be able to continue operating, but if dissolved they wouldn’t have the assets to cover its liabilities. These firms employ an estimated 1.8 million workers.

In addition, the analysis finds that the number of firms in the UK who are “zombies” – meaning that their profits only just cover their debt interest payments – and in some cases cannot cover them at all – has risen sharply in the last six months since March, by up to 4%. This means that the total share of zombie firms in the UK economy is now 20%, representing one in five firms. Things would have been considerably worse had the Treasury not acted to support firms through loans and the furlough scheme. Onward estimates that 12% of firms would have suffered a cash flow crisis, meaning that their working capital would have fallen below the resources needed to continue trading, had they not had access to support from the Exchequer. This represents 350,000 firms who collectively employ 5 million people.

The report explores different ways to reduce the negative impact of growing corporate debt accumulation on the recovery and argues for a new scheme, New Start, under which HMRC would allow firms to pay down their government-issued debt over a long period, through a surcharge on taxable profits and shareholder salaries, rather than over the next few years when investment and growth are more of a priority than deveraging. Under this arrangement, firms would only pay when they became profitable again, much like under the existing student loan system for tuition fees. This scheme allows loans to be paid back through taxes on profits would provide the economic flexibility and administrative efficiency needed to overcome this crisis, maximising taxpayer value for money at the same time.

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