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How Covid-19 business support entrenched inequality in Britain [1]

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Date: 2023-05

It can be difficult to appreciate the scale of public funding utilised to support the UK economy during the pandemic.

The numbers rung up by the Bank of England’s Asset Purchase Facility, which ultimately financed government programmes such as the furlough scheme, peaked at £895bn towards the end of 2021. This is equivalent to six years of NHS England resource spending.

Not all of this went directly to businesses. Nonetheless, Treasury support represented an unprecedented peacetime transfer of capital from the public to the private sector.

The vexed question of how this cash passed through the economy – who came out ahead and who lost out – is one that we have been trying to answer during 18 months of in-depth research. In the first instance, we focused on trends in executive pay, dividends to shareholders, and differences in pay between company bosses and ordinary employees.

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What we found provides a fascinating window on to how our economy is organised: who it rewards and who it leaves behind.

Government messaging consistently justified efforts to prop up the economy with appeals to general interests, such as “protecting jobs and livelihoods” and helping to “ease the financial burden for businesses and the UK population”. But the problem with such abstract, universal goals is that they can gloss over the effects of large injections of money, tax relief and loans on an economic system that is effectively structured to concentrate wealth.

For example, take government-supported loan schemes. These underwrote private bank loans to businesses, effectively protecting banks against losses if borrowing companies default. The sums lent under the schemes were huge. But while there has been a lively debate on the eventual bill to the Treasury, few have given much thought to how the schemes baked in existing economic imbalances between smaller businesses and major banks.

Here, it’s useful to look at the costs and benefits on each side of the loan arrangement. For the banks, schemes tailored to support small and medium-sized businesses covered lender fees and interest payments in the first year of the loans at a combined cost of £1.5bn. They also protected major banks from an existential surge in bad debts, allowed them to profit from new streams of interest payments, and reduced the impact of growing loan books on the amount of capital they have to keep in reserve under international rules. This makes more money available for senior bankers’ pay and dividends to shareholders.

On the other side of the loan, the outlook is significantly less rosy. Borrowers remain fully liable for their debts. Predictably, debt among smaller businesses has increased significantly, which partly explains the steep rise in companies going bust. In the second quarter of 2022, total company insolvencies in England and Wales reached their highest quarterly level since the third quarter of 2009, 81% higher than the second quarter of 2021.

Government support to businesses will, on balance, compound prevailing economic inequalities if nothing is done to address disparities in bargaining power, and the laws, systems and institutions that underly existing transfers of wealth.

Executive pay

This compounding inequalities effect is arguably best illustrated by contemporary trends in senior directors’ pay at FTSE 350 companies. At one level, executive pay followed a predictable pattern, falling in 2020/21 during the peak of the pandemic, and then picking up again in 2021/22 once the economy had begun to open up. Most people missed that this uplift in pay took average awards beyond their pre-pandemic level, reversing a pre-pandemic trend in executive pay, which had been declining since 2016/17.

So, across all large companies, the pandemic has provided cover for a culture of restitution in executive pay, where companies across the FTSE 350 have sought to make good the losses in senior directors’ pay experienced during the peak of the pandemic.

But what’s really striking is that our research reveals that this bounce-back in executive pay has been particularly strong at companies that took government support. Chief executive officers (CEOs) at FTSE 100 companies that accepted money in order to furlough workers, for example, enjoyed significantly higher increases in total pay than those at other FTSE 100 companies, even when profits and other relevant variables affecting executive remuneration are taken into account.

The clawback effect is reflected in yawning pay differences at companies that took government support. On average, FTSE 250 companies that furloughed workers, deferred taxation and enjoyed business rates relief have seen steeper increases in the pay gap between CEOs and ordinary workers.

These effects have primarily come about through annual bonuses, the application of which is typically determined year-to-year. In the financial year following the peak of the pandemic (2021/22), average bonus pay for CEOs at FTSE 100 companies was 51% higher than that paid out in the year before the pandemic.

In some cases, bonus pay-outs were specifically adjusted to reflect the increased difficulties executives faced in meeting financial targets under more challenging economic conditions. F Scott Fitzgerald wrote that “the rich are different from you and me” – and certainly the institutional arrangements for costing their labour seem more benign.

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[1] Url: https://www.opendemocracy.net/en/oureconomy/covid-19-furlough-business-rates-relief-inequality/

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