Launching an attack on the government over its emergency loan guarantee scheme for businesses struggling during the crisis, Lord King said ministers needed to urgently “get a grip” on the situation to prevent lasting damage to the economy.
In an interview published a day after the Bank’s current governor, Andrew Bailey, said the British economy could bounce back much faster than it did after the 2008 crash, he said: “It is silly to make precise numerical forecasts at this stage. What I will say is that there is too much confidence in a quick V-shaped recovery. It will take longer.”
King led the response from Threadneedle Street to the near-collapse of the banking system, before standing down in 2013 to be replaced by Mark Carney. He told the commentary website Reaction that it was important the productive capacity of the UK economy was not damaged by unnecessary bankruptcies.
But he said he was concerned for the fate of small and medium-sized businesses because the government loan scheme had been plagued with problems that the Treasury has needed to iron out since its launch.
“Somebody in government still needs to get a grip on this,” he said, adding that ministers should appoint an outside expert to handle the coronavirus business interruption loan scheme (CBILS) and the newly launched bounce-back loan scheme to speed up lending to firms.
“Politicians are used to making announcements. But they have no experience in actually running anything. I think the problem has been less the high-level design of schemes and more the need to worry about their implementation on the ground.”
An increasingly outspoken critic of Britain’s economic policy since he stepped down, King’s intervention comes after the Bank warned the country is heading for the steepest recession in more than three centuries. The Bank said the economy could shrink by 14% this year, the biggest slump since the downturn of 1706.
However, it believes the economy could recover rapidly next year, with a growth rate of 15%, returning to its pre-Covid-19 peak by the second half of 2021 in a sharp V-shaped recovery.
King criticised high street banks for processing the CBILS loans too slowly, saying they had a “mind of their own” that stopped them getting cash out of the door faster. “They were anticipating the losses that these companies might make, and they knew that loans might never get repaid,” he said.
The government raising its guarantee on loans of up to £50,000 for small firms under the bounce back scheme – which offers guarantees of 100% – was a step in the right direction, said King. But he argued the government should have made 100% guarantees on all loans from the outset of the scheme, at least for an initial period until the economy started to recover.
The chancellor, Rishi Sunak, staged a U-turn last week following pressure on the government from Labour and business chiefs to rethink the loan scheme for small firms, which had previously offered only 80% guarantees from the state.
As recently as a week before launching the bounce-back scheme Sunak had said he was “not persuaded” by calls to provide a 100% state guarantee, despite fewer than half of all applicants for support under the old system securing a loan.
King said the government still needed to make further changes, and suggested grants could be made to small businesses because many were slipping through cracks in the Treasury’s system.
He said he was also surprised the government had not thought of using a policy of “reverse taxation” to make direct payments to firms by using their connections to HMRC for paying employees’ income tax and VAT.
A Treasury spokesman said: “We’ve taken unprecedented action to support business of all sizes to get through this economic emergency caused by the pandemic. The banking and finance sector has lent over £5.5bn to SMEs so far through the Coronavirus Business Interruption Loan Scheme, and our new Bounce-Back Loan Scheme will ensure that small firms who need vital cash injections to keep operating can get finance with a 100% government-backed guarantee in a matter of days.”