The Government has taken very extensive and expensive action to protect households from the immediate consequences of the coronavirus economic crisis. It has also announced a series of measures to try to ensure that viable businesses survive to benefit from the economic recovery. However, designing cost-effective support for the business sector is a difficult task, one that a range of countries have approached in different ways over the last two months.
If a swathe of businesses close for good now, it will be very difficult to get replacement businesses to start up and help drive the recovery. When a business closes, its assets are liquidated and sold off. Any replacement business would need to assemble the financial and physical capital to get off the ground. That would be time-consuming and expensive, delaying economic recovery and restoration of jobs. That’s why it makes sense for the State to work to preserve viable businesses in “deep freeze” mode through the crisis.
While for these reasons it is warranted to use taxpayers’ money to protect private sector businesses in this crisis, it’s important to do this carefully, so that the wider public interest is served, and not simply the interests of business owners and shareholders. We don’t want to see a repeat of the recriminations that followed the bailout of the banks.
Full recovery
While problems will be more limited for companies in sectors like building and construction that are beginning to return to work, the prospects for companies in the hospitality, tourism and international travel sectors are most uncertain, because a full recovery is unlikely before 2022.
The initial State response was broad brush: speed was of the essence, and ensuring workers could stay home in the interests of public health, without losing their jobs, was the overriding consideration.
Now, as continuing assistance to business will be required in the recovery period, a more fine-tuned approach is necessary. The State needs to ascertain, as far as possible, which businesses are fundamentally viable, and have a future in a recovering economy. If the net is drawn too wide the State will end up losing money. This is one reason why loans may be preferred: if a business survives, the State gets its money back.
However, SMEs are very reluctant to borrow, particularly in these uncertain times, so grant aid may be needed to enable some businesses survive. The cost of such aid will be a function of how long it will be before the business begins to recover, and what are the minimal outgoings of the business while it is “frozen”.
For many SMEs their biggest cost is their wage bill, and the State schemes have substantially reduced or eliminated this outgoing: where employers want to hold onto their workers there is a labour subsidy covering most of the wages, and for those laid off, there is the special Covid-19 welfare scheme.
For many SMEs in the hospitality or retail sectors, the next biggest continuing cost is rent. However, while the State will want to support such businesses to weather the crisis, it’s hardly in the public interest for the State, as the retail sector has suggested, to support landlord incomes by providing subsidies to enable companies meet their rent payments. Landlords should shoulder their share of the pain from the coronavirus recession.
Bargaining power
Sensible landlords will, in any event, drastically cut rent till the recovery starts. If they force a business to close, it is likely to be a long time before they find a new tenant, while existing businesses will be quicker to return to profitability and to be able to pay rent.
However, we know that landlords are not always sensible. If the State is providing support to SMEs, I suggest it should be conditional on a business reaching an agreement with the landlord to cut rent by at least 75 per cent till the recovery begins. Such a condition would strengthen tenants’ bargaining power. If such an agreement is reached, then only a small part of any State support will go to property owners, and the bulk of it will go to ensure a business survives.
For larger firms, the State should ensure some upside for the taxpayer to any support. This could be in the form of a loan that can be converted into equity for the State, if the business cannot repay the loan.
If the State is committing substantial funds to support business, it should also seek wider returns to society, for example by setting conditions on environmental sustainability and climate goals.
