With many individuals unable to work and businesses forced to put their operations on hold because of coronavirus, countries around the world have put support packages in place to help their economies through the pandemic.
But the unprecedented nature of the crisis, coupled with differing cultures, business practices and attitudes to welfare, means governments are taking markedly different approaches, with the measures adopted by the UK and US a good example of this.
Randall Kroszner, professor of economics at University of Chicago’s Booth School of Business, is in a good position to compare the two.
A former governor of the Federal Reserve, serving between 2006 and 2009, he’s now based in London. He says: “There are similarities in approach, with both governments launching innovative, but very different, programmes to support individuals and businesses.
“They focused on what support was needed if you shut the lights off for a month or so.”
He points to similarities in the action taken by both countries’ central banks to support the wider economy: “They took bold and rapid action, cutting interest rates, launching non-traditional asset purchase schemes and demonstrating a strong commitment to keep rates low for the long-term.”
But while there are similarities in the general approach, there are differences in the details of the package of measures used to deliver support.
UK approach
The UK government’s support package focused on keeping businesses afloat and workers on the payroll. These are the key components:
Coronavirus Job Retention Scheme
This enables employers to put their staff on furlough and claim a payment to cover their wages.
The first iteration of the scheme, which ran until the end of July, allowed employers to claim (and pay over to staff) 80% of employees’ wages, capped at £2,500 per month, plus any employer national insurance and pension contributions.
(The money in the hands of the employee is still subject to deductions for tax, national insurance and pensions.)
The second scheme, which ends on 31 October, allows for greater flexibility through part-time furloughing, but also requires employers to make a financial contribution to their furloughed employees’ wages as government support reduces.
Employees on furlough continue to receive 80% of wages up to £2,500 a month.
Employers will also be able to claim a Job Retention Bonus of £1,000 for every employee that was furloughed and is still employed at the end of January 2021.
The Job Retention Scheme has cost the government almost £34 billion and covered 9.6 million jobs.
Self-Employment Income Support Scheme (SEISS)
Similar in style – and benefit level – to the Job Retention Scheme, SEISS allows self-employed people who were adversely affected by Covid-19 to claim grants calculated as a percentage of trading profits.
The first grant, for the period up to 13 July, was capped at £7,500 for the three-month period. The second grant, for which applications are currently open, is worth up to £6,570.
Grants do not need to be repaid but are subject to income tax and national insurance.
SEISS has been criticised because self-employed directors of limited companies, those with profits of more than £50,000 a year and individuals who had only become self-employed since the end of the 2018/19 tax year to qualify.
Bounce Back Loan Scheme (BBLS)
The BBLS enables smaller businesses to borrow up to 25% of their turnover, between £2,000 and capped at £50,000.
The government guarantees 100% of the loan and there are no fees or interest to pay for the first 12 months. After that, the interest rate is 2.5% for the remainder of the six-year term, and there are no penalties for early repayment.
Over 1.7 million firms have so far arranged £35.47 billion of Bounce Back Loans.
Coronavirus (Large) Business Interruption Loan Schemes (CLBILS, CBILS)
Separate schemes are available for large and for small to medium-sized businesses, enabling them to borrow up to £200 million and £5 million respectively.
The government guarantees 80% of the loans and pays interest and any fees in the first year. Around 90 lenders, including all the main retail banks, are participating in the schemes, and interest rates vary.
Over 60,000 of CBILS worth £13.68 billion have been approved along with £3.50 billion worth of CLBILS loans to 516 applicants.
Business grants
As some businesses were more affected than others by lockdown, such as those in hospitality and retail, the government also offers a range of grants to help them stay afloat. Administered by local authorities, these give access to grants worth up to £25,000.
Eat Out to Help Out
In another measure designed to help the hospitality industry and get the public spending again, the chancellor, Rishi Sunak, announced that the government would subsidise restaurants, cafes and pubs during August.
Under the Eat Out to Help Out scheme, eateries can offer half price meals with non-alcoholic drinks – up to a maximum discount of £10 per person – for anyone dining on Mondays, Tuesdays or Wednesdays.
It was used more than 35 million times in its first two weeks – at a cost of over £180 million to the taxpayer.
The government has also reduced the rate of VAT paid by the hospitality outlets, hotel and holiday accommodation providers, and visitor attractions. It will remain at 5% (rather than 20%) until 12 January 2021.
US approach
The US approach – a $2 trillion stimulus package called the CARES (Coronavirus Aid, Relief and Economic Security) Act – also seeks to support business but includes payments directly to households. These are the key elements:
Paycheck Protection Program
The Paycheck Protection Program, or PPP, targeted support to businesses with fewer than 500 employees. Under the program, they can access loans worth 2.5 x the average monthly payroll, or $10 million if greater.
The loan has a five-year term and an interest rate of 1%, but all or some of it will be written-off if certain conditions are met. These include keeping employees on payroll and using at least 60% of the loan for payroll.
PPP accounts for around $650 billion of the support package.
Pandemic Unemployment Assistance
As well as extending eligibility for unemployment benefits to groups including the self-employed and part-time workers, a key feature of the first wave of this package was an additional payment of $600 a week.
This level of uplift ended at the end of July, with President Donald Trump signing an executive order at the beginning of August to restart payments of an additional $400 a week.
Further detail of the new enhanced payment is still awaited. There are concerns that, with $100 of the $400 payment due to come from the individual’s home state, many states will see the unemployment benefits they already pay to an individual as accounting for their $100 contribution, leaving the net uplift at just $300.
You can read about the current state of play here.
Stimulus Check
A markedly different element of the US approach was the provision of a payment for households, known as the stimulus check.
Anyone earning up to $75,000 (or £112,500 for heads of household and $150,000 for couples filing together) received the full $1,200 ($2,400 for couples), with parents receiving $500 for each child under the age of 17.
The amount reduces by $5 for every $100 earned above the relevant threshold.
A second check is expected. Although the Democrats and Republicans are yet to reach an agreement, it is possible that this second stimulus check will target lower-earning households.
Comparing the two approaches
How successful these support programmes will be, both in the short and long-term, is as yet uncertain.
“It’s too early to give grades,” says Kroszner. “There are still a lot of exercises the students have to do before we can see the complete picture.”
However, there are some areas of each country’s economy that have responded very differently. In particular, although the objective of both the UK’s Job Retention Scheme and the US’s Paycheck Protection Program is to keep employees on payroll, the US has seen a much sharper increase in unemployment over the course of the pandemic.
In the UK, unemployment remained at around 3.9% in July, but in the US it shifted from 3.5% before the pandemic to 10.2% in July.
Wen-Wen Lindroth, lead cross-asset strategist at Fidelity International, says this may be a reflection of two very different labour market models: “In the US, the idea of supporting people’s jobs is almost anathema. Automatic stabilisers are just not part of the culture. This can mean more pain on the way down but should make hiring faster on the way up.”
Another major difference is the level of support provided to individuals through the US package.
As well as the household stimulus check, boosting US unemployment benefits by $600 a week is seen as necessary by some, but overly generous by others.
Lindroth says: “Studies have shown that 60-70% of recipients were taking home more in unemployment benefits than they were earning and there have been reports of employees wanting to be fired so they could claim.
“It’s difficult: the Democrats argue that it’s necessary while the Republicans say it acts as a disincentive to work. This difference in opinion makes it hard to reach an agreement.”
Next steps on treacherous ground
It’s also important to note that, while the support packages were initially designed to prop up each country’s economy during a relatively short spell while Covid-19 was quashed, the pandemic is expected to play out over a much longer period.
This, Kroszner says, will further test the different approaches: “There’s hesitancy from both governments about taking the next step. They need to accept that many jobs and businesses can’t come back from the crisis and then find ways to minimise the damage.”
As part of this, he recommends the UK doesn’t extend the Job Retention Scheme beyond October and instead shifts the focus to defending the position of households rather than job preservation.
“It’s better for someone to look for a new job than be put on hold,” he explains. “The Covid-19 meteor has struck and it will make the dinosaurs extinct, but we also need to be positive, and learn and evolve from the experience.”
