Firm insolvencies have fallen and cash reserves risen during the crisis – but targeted support still needed 10 February 2021 Unprecedented Government support has helped firms to increase their cash holdings during the current crisis, but further support will be needed in the Budget to ensure they can drive Britain’s recovery, according to new Resolution Foundation research published today (Wednesday). On firm ground? – the first of four Recovery Plan papers to be published by the Foundation over the next two weeks – examines the position of firms during the Covid-19 crisis, and their prospects for powering the recovery. The report finds that, despite the economy experiencing the sharpest downturn on record, the equally huge policy response from Government – including access to £87 billion of cheap finance, the £59 billion Coronavirus Job Retention Scheme and £16 billion of direct grants – has helped firms to weather the Covid-19 crisis far better than many expected. Insolvencies in 2020 were actually down by a quarter on 2019 levels, while firms’ cash holdings have increased by £118 billion, in stark contrast to an average deterioration of around £40 billion (in today’s prices) over the past four recessions. The report adds that while much of this extra cash has been raised by taking on additional debt, the UK’s corporate debt-to-GDP ratio is still well below levels seen during the financial crisis. However, On firm ground? warns that while the corporate sector as a whole is faring better than many would have expected given the scale of the crisis, firms in hard-hit sectors of the economy such as hospitality are experiencing major difficulties. These difficulties risk turning into widespread insolvencies and redundancies unless action is taken, it warns. More than half (53 per cent) of hospitality firms have fewer than three months’ worth of cash reserves left, up from 36 per cent in September. These firms say they are far more likely to close sites or make redundancies over the coming months. The Chancellor should provide direct grants targeted at firms in these sectors most affected by ongoing restrictions in the upcoming Budget, says the Foundation, building on the grants announced at the start of the lockdown in January. On firm ground? says that prospects for a broader economic recovery risk being weighed down by uncertainty about the path out of the pandemic and timetable for easing public health restrictions. In order to address these problems, the Foundation says the Chancellor should also: Extend the Coronavirus Job Retention Scheme beyond the end of April, and set out a phased withdrawal of the scheme; Extend business rates relief until the end of June; and, Delay the start of VAT deferral payments, which are due at the end of March. Finally, the report says that while overall corporate debt levels are not a major concern, the cheap loans that have helped firms through the crisis will, in some cases, risk holding back the UK’s recovery. Where they have left firms overindebted, this will discourage investment and hiring, creating a new class of Zombie firms’ that operate to service their debts, rather than expand and grow. In order to tackle this risk, the Foundation says the Chancellor should avoid offering a fresh tranche of business loans. Instead give he should banks a clear incentive to address problems faced by some firms, by transferring 20 per cent of the liability of the Bounce Back Loan scheme to the issuing banks, in exchange for a fee. Jack Leslie, Economist at the Resolution Foundation, said: “Over the past year, businesses have experienced both a huge economic hit and an unprecedented policy response from Government. This response has been very successful in preventing firms from going under, and even helped them to boost their cash reserves. “But while the path to recovery is now in sight, business still face huge problems ahead. Firms in social sectors like hospitality are running out of cash, and many are likely to shed staff or fold altogether unless further targeted support is provided. “In his upcoming Budget, the Chancellor should extend business support to help firms through what is hopefully the last phase of the crisis. But he also needs to look beyond the pandemic, and ensure that some firms’ higher debt levels don’t reinforce Britain’s poor investment record that was holding back growth long before the current crisis began.” Notes to Editors Embargoed copies of On firm ground? are available from the press office. The report will be launch at an event with CBI Director-General Tony Danker and Senior Partner at McKinsey Dame Vivian Hunt at 3.30pm on Wednesday (10th Feb). Register to attend the webinar here.