Lord Agnew is right: Covid support write-offs deserve more resources

At the start of the financial crisis, when stories were emerging every day of new multi-billion pound losses in the market, you often heard a quote first attributed to the late Senator Everett Dirksen [1]: “a billion here, a billion there, and soon you will be talking about REAL money”. [2] The sour joke could well have happened to Lord Agnew as he considered the sums being written off as fraud on Covid support packages, before stepping down as Minister for Efficiency and Transformation.

The numbers involved in government support for businesses during the pandemic are so large that they cast a veil of unreality over the whole subject. The different types of Covid support include around £80bn for the Coronavirus Job Retention Scheme (CJRS), £47bn for Bounce Back Loans (BBL) and over £30bn for other job retention schemes. loans.

The amounts at risk of fraud go far beyond a rounding error

The amounts at risk of fraud or bad debts are accordingly monumental. Focusing only on BBLs – the system in which banks were encouraged by a 100% government guarantee to lend money with minimal controls – the first estimates from the Department for Business, Energy and Industrial Strategy (BEIS) and the British Business Bank were between 35% and 60% write-offs. BEIS now expects a figure around the lower end of that estimate – a still whopping £17billion. Nearly £5 billion is attributed to fraud, with the rest due to defaults and errors. [3] To put that into context, that’s a bit more than the amounts set aside for the government’s flagship leveling fund.

The Chancellor, Rishi Sunak, is right to recall what was at stake when the BBLs were unveiled. In April 2020, the economy suffered its largest contraction on record. It was ultimately expected to lose almost 10% of its production in 2020, or around £200bn. Hundreds of thousands of businesses saw their income disappear when everyone was ordered to stay at home. No one was sure what kind of recovery might follow, in the face of the millions out of work and a host of UK businesses wiped out by the recession. According to the Public Accounts Committee, no economic analysis of the BBLs has been carried out [4]. But such an analysis could well have estimated the value of saving so many thousands of companies in the billions.

Billions in loans, billions in write-offs, billions in potential profits – it’s easy to see how the dizzying numbers could make the fraud problem look like a rounding error. But Lord Agnew’s concern is well founded. Every billion lost by fraudsters is a billion pounds to be collected from future taxpayers or cut from other public spending, no matter if it is a fraction of some other even bigger figure.

The point of contention is not whether BBLs should have been introduced

At the Institute for Government, we were among a minority who warned of a headlong rush to unconditional debt financing [5]. We argued that many companies would go into debt they could not afford and were planning for a recovery which could be difficult given the high financial burden of repayments and the time wasted searching for debts. Economic analysis does not exist to judge this question, but in any case Lord Agnew’s complaint does not relate to the very creation of the BBLs, which he described as “an important and successful intervention”. Instead, the concern is the lack of priority and resources given to vigorously prosecuting fraudulently claimed loans.

Radiation numbers in the billions deserve more resources. If BEIS really employed two fraud managers at the start of the pandemic, then it was clearly insufficient; compare that to BBL’s £2bn agreed on day one alone. Since then, more resources have been invested. Following Lord Agnew’s resignation, the Chancellor took to Twitter to defend the government’s efforts. [6], highlighting a £100million investment in a “taxpayer protection task force”, with more than 1,300 staff having carried out 13,000 individual inquiries. But this unit was only created in March 2021 and is responsible for looking at a range of Covid support programs, including CJRS, all the different loan programs and even Eat Out to Help Out (which offered discounts for more than 160 million meals [7]). In some context, the Student Loans Company, which manages a total debt of around £100 billion and a much lower fraud rate, has 3,000 employees and incurs staff and administration costs of around £200 million pounds per year. [8]

HMRC says this task force will recover more than £1billion over the next few years. This is a good return on investment, but such a good return that it suggests the taxpayer would benefit from an even greater commitment of funds and manpower.

The case for blaming the banks is harder to make

It is difficult to assess the correctness of the claims that the lending banks are to some extent guilty of excessive fraud. The BBL program was explicitly designed to force banks to give up their prudence. In the lead up to the creation of these loans, they had been harassed for weeks over an inability to get money out at the rate seen in Switzerland or Germany. They knew better than anyone how ill-equipped borrowers were and how easily fraud could occur. The British Business Bank has issued a booking notice setting out its explicit concerns about fraud [9]. He clearly understood how the risk of credit, fraud or error is best managed preventively, not by fierce ex post actions, and that this is not possible when events are unfolding at such a rapid pace.

The government might have wanted a system in which banks and their shareholders funneled state-guaranteed money to millions of borrowers, with no risk to their own money and no cumbersome bureaucracy slowing it all down, all by acting with enhanced determination in pursuing refunds and subsequent fraud, bearing all reputational risks that ensue. This hope is commercially unrealistic. Such a system cannot exist and the government has been warned that it cannot.

Better design and better deterrence were possible

More resources to chase fraud after the fact can’t do much – there have been more than 1.5 million bounce loans issued, and probably hundreds of thousands of defaults. Lord Agnew suggested the use of more fraud experts in the creation of loan ideas, which could have led to a more robust approach. [10] In April 2020, the government moved from an approach that backed loans with ordinary, time-consuming protections to an approach with virtually no – no credit checks and self-certification on the issue of being affected by Covid. It’s hard to believe that it struck the right balance and that with a little more thought, an effective system could not have been created to guard against some of the more egregious frauds that have emerged. A task force against fraud could have been set up earlier, as was the case in Switzerland for example.[11]

In other respects, the opportunity for greater deterrence has been missed. Rebound loans took off so quickly because to many recipients they seemed like free money. Government communications have done little to highlight the danger of getting into debt that is difficult to repay. After hearing so much frustration at the slowness of previous programmes, the Chancellor himself made a virtue of the lack of controls involved in BBLs, telling MPs: “There will be no forward-looking tests of the viability of companies; no complex eligibility criteria; just a simple, quick and standard form for businesses to fill out. »

In Whitehall, it can sometimes seem like money has a different significance when it’s labeled one way rather than another. [12] A one-time expenditure of millions will attract endless scrutiny, while a tax break that costs hundreds of millions, each year, goes unnoticed. Losing money on a loan issued during a crisis may seem less damaging than actively paying it to a criminal. Lord Agnew’s job was to resist such prejudice. We must not allow the unique and extreme circumstances of the pandemic to overshadow what is clearly a less than adequate performance in this area. Just as rule-breaking behavior is no longer forgivable during a pandemic, fraudulently incurred debt must be prosecuted regardless of whether the loan was incurred during a crisis. Every billion counts.

  1. https://www.senate.gov/artandhistory/history/minute/Senator_Everett_Mckinley_Dirksen_Dies.htm#:~:text=Cautioning%20that%20federa….

  2. Joke seen in the wild here with Martin Wolf (using a trillion) https://www.ft.com/content/0e63ad12-ef9c-11dc-8a17-0000779fd2ac

  3. https://www.ft.com/content/e23871ba-3467-4045-83e6-3da5b0a7566d Financial Times, “UK banks fend off Covid loan fraud concerns”, 25 January 2022

  4. https://committees.parliament.uk/publications/3988/documents/40040/default/

  5. https://www.instituteforgovernment.org.uk/blog/governments-coronavirus-bailout-should-not-be-built-unaffordable-loans

  6. https://twitter.com/RishiSunak/status/1486332699337973763
  7. https://www.gov.uk/government/statistics/eat-out-to-help-out-statistics/eat-out-to-help-out-statistics-commentary

  8. Figures gleaned one way or another from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/946122/Annual_Report_2019-20_V6.pdf

  9. https://www.british-business-bank.co.uk/reservation-notice-for-the-bounce-back-loan-scheme/

  10. https://www.thetimes.co.uk/article/lord-agnew-billions-were-written-off-and-no-one-seemed-to-care-but-me-cvnsqjbzp

  11. See how governments are fighting Covid bailout fraud – FTAdviser.com from August 2020

  12. See www.ft.com/content/4c130544-e0fa-11e3-875f-00144feabdc0 “Five lessons from Whitehall that Sir Humphrey never learned”, Financial Times, June 6, 2014 – my first comment after leaving government