This guest blog from the Institute for Government summarises research commissioned by SPICe to support the work of the Economy, Energy, and Fair Work Committee looking at the impact of COVID-19 on Scotland’s businesses, workers, and the economy. The aim of the research was to explore how selected governments around the world have supported businesses with COVID-19. The full report provides further detail on the research.
As with all guest blogs, what follows are the views of the authors, not those of SPICe or indeed the Scottish Parliament.
Businesses are in need
The arrival of coronavirus and the restrictions which followed – in the UK and elsewhere – have put major strain on businesses. Shops and workplaces have been forced to close, social distancing has impacted on production, as well as on people’s shopping and socialising habits. These pressures have decreased businesses’ revenues, putting pressure on their finances and making it more likely that they would be forced to reduce their activity, lay off staff or even close permanently.
If businesses had made irreversible decisions to make staff redundant or shut up shop at the height of the COVID-19 crisis simply because of temporary cashflow problems, it could have had major and lasting economic costs. Such decisions would have risked destroying hard-won, productive relationships between businesses and their employees and customers and dissipating the knowledge collected in the business.
Governments have stepped in
As a result, governments stepped-in to ease businesses’ cash flow problems and help them weather the storm.
In most advanced economies, governments have incentivised firms to retain their employees by offering wage subsidies (like the UK’s Job Retention Scheme). But governments have also adopted a range of other measures, such as deferring or cancelling taxes, offering government-guaranteed loans on generous terms, handing out grants to businesses and offering financial help and incentives for businesses to adapt their ways of working to become COVID-safe.
The types of policies that different countries have adopted have been remarkably similar, as our new report for the Economy, Energy, and Fair Work Committee shows. Nine advanced economies – Canada, France, Germany, Ireland, Japan, New Zealand, Norway, Singapore and Sweden – have deferred and in most cases cancelled the payment of some business taxes; all provided government guarantees on private loans to businesses or lent directly from the government.
Except New Zealand, all the countries also gave money directly to businesses through grant schemes. In some cases, these countries even copied or adapted schemes that had already been used elsewhere, helping to create a picture of some degree of uniformity, especially in the early stage of the response when governments were keen to get money to businesses as fast as possible.
Government choices are important
But there have been some important differences in how governments have responded, driven both by different policy priorities and by variation in the institutions and policies that existed on the eve of the crisis.
For example, countries with state-owned banks (including Ireland, Germany, France and Japan) used the expertise of those institutions to guarantee loans or lend directly to businesses, while countries without such institutions (like the UK) instead channelled funds through private sector banks.
Different governments have also so far taken very different views on the need for the state to take equity stakes in strategically important businesses. The governments of New Zealand, Sweden and Singapore have all bailed out their national airlines by taking new equity stakes – or providing loans that could in future be turned into equity stakes. Conversely, the Norwegian government has supported its national airlines solely through loans. These differences in approach correlate with each of these government’s existing ownership of the airlines – with the governments of New Zealand, Sweden and Singapore already owning a stake in their airlines pre-crisis, while the Norwegian government had divested itself of its stake two years earlier.
Finally, there are significant differences between countries in how much they seem to be prioritising preserving businesses at all costs – in the hope of helping the economy will recover more quickly once the threat of coronavirus recedes – over ensuring that businesses continue to be allowed to fail to ensure workers move to more viable sectors and to encourage businesses to be dynamic. Some countries, especially Germany and Norway, have erred on the side of preservation: compensating businesses for the losses they have suffered, offering generous loan terms and making changes to the law to make bankruptcies less common. Others, such as Singapore, have favoured enabling and encouraging businesses to adapt to the new reality – providing grant support to help businesses adapt and restructure in the face of the crisis.
There are some indications – especially Chancellor Rishi Sunak’s decision not to extend the generous Job Retention Scheme beyond October – that the UK government leans towards the latter approach, although it is continuing to provide significant support to businesses, including through loans at generous terms and ongoing tax deferrals.
Some schemes are more effective that others
It is too early to have a clear sense of which countries have been most successful in supporting businesses through the crisis. Most of the strategies have been focused not only on preserving businesses in the short-term but on shoring up the long-term health of the economy.
But there are some early indicators of how well different countries have done. Data on the number of business bankruptcies since the spring suggests that the rate of business failure has fallen below normal levels in Germany and Norway – suggesting that business bailout policies there may be keeping some businesses on life-support that would have gone under in normal times. Conversely, in Sweden – whose guaranteed loan scheme has hardly been used by businesses – the bankruptcy rate is running slightly above normal levels, suggesting some businesses may not have got the help they needed.
Most support has been provided by central government
In most of the countries we examined, business support has been provided predominantly at a national rather than a local level. This is partly because national governments are better able to borrow large amounts of money at short notice, and partly to ensure money is targeted fairly on a national level rather than business support being reliant on the fiscal situation of individual parts of the country.
However, subnational governments have been used to distribute business support (particularly grants) and some have provided their own support schemes. This is similar to what the devolved governments have done in the UK. Business support programmes run by subnational or devolved governments have been particularly prevalent in Canada and Germany (which are both federal states), as well as Japan and France where regional or city governments have for a long time had significant power and autonomy.
During the crisis, these subnational governments have focussed on providing loan and grant schemes to help sectors or types of businesses that are particularly important to their region and hard-hit by coronavirus. For example, in Germany, Bavaria has its own investment fund to take equity stakes in businesses judged to be particularly important to the local economy.
The decisions made by governments on business support are very strategic ones, often based on political ideology (especially over the role the state should have in the market). All of these governments have prioritised certain types of businesses over others – with most targeting support at small and medium-sized firms rather than big businesses, providing extra help for exporters and start-ups, and picking certain sectors to receive additional aid.
Governments’ choices will have significant long-term consequences. The countries we have looked at are all trying to tread a delicate line between the risks of doing too little and doing too much.
Providing too generous support may waste taxpayer money and result in a more sluggish recovery, dragged down by a proliferation of ‘zombie’ companies only sustained by government subsidies. Governments that choose reduced support, on the other hand, risk increased unemployment and business failures, with potentially damaging effects on longer-term economic growth.
These considerations are further complicated by re-emerging restrictions in many parts of the world, including local lockdowns which have in some countries been met with extra targeted business support. Our report for the Committee shows that governments must be flexible to cope with changing economic conditions, realistic about which businesses can be saved and clear on why they decide to help certain firms.
Feature image by Pixabay is licensed under CC BY 2.0
Gemma Tetlow (Chief Economist) and Grant Dalton (Research Assistant), Institute for Government