A Program of Guaranteed Loans to Compensate SME Covid-19 Revenue Losses: Rapid Dispersal and Large Net Economic Benefits

Publication date: 14 Apr 2020 | Publication type: Policy Paper | External Author(s): Milne, A | Report number: 15


This paper explores the costs and benefits of compensating those UK SMEs who have experienced substantial revenue loss as a result of the current closure of their business activities. It finds that the benefits very substantially exceed the costs, by a ratio of 5:1 (every £1 of government spending to save small business has a payback of £5). It also argues that this relief can be provided extremely rapidly – within days – through a quick-dispersing loan, 100% or near-100% guaranteed by government and routed through bank and non-bank lenders, and with the available loan amount calculated from the revenue loss of the firm (so avoiding fraud) and subsequent conversion to a grant based on restoring that proportion of value-added needed to maintain the firm and prevent insolvency. This mechanism can be offered to SMEs of all sizes and also all ownership structures (corporates, single director companies with no employees, non-profits and mutuals, partnerships etc.) and could even be extended to larger firms. This argument is supported by a simple circular flow of income analysis, from which we estimate that the resulting economic shock could easily be around one-quarter of GDP as long as the lock down continues, with a resulting reduction of productive capacity through SME failure of around 5% of GDP. This reduced productive capacity, with an estimated consequent cumulative output loss of 15% of GDP, can be prevented through a loan program for SMEs at a net fiscal cost (in addition to those already taken) of only 2.9% of GDP.

Keywords: Coronavirus, Covid-19, Disaster Risk, Financial Crises, Fiscal policy, Insurance, Monetary policy, Pandemic risk, Systemic Risk

JEL numbers: E62, E65, G01, G22, H50​