Business Plus

Policy Dilemma Over Ending Cash Supports

State funding for companies impacted by the pandemic is being gradually withdrawn. Emily Styles wonders what happens next


State cash supports for enterprise through the Covid pandemic have been substantia­l. Initial income supports for workers and business owners in 2020 were followed by a range of schemes to aid businesses with liquidity, and to help cover part of their fixed costs (see table).

The National Competitiv­eness and Productivi­ty Council (NCPC) calculates that total direct expenditur­e measures, such as the Pandemic Unemployme­nt Payment, Employee Wage Subsidy Scheme, Small Business Assistance Scheme for Covid, etc. total €38bn for 2020 and 2021. Taxation measures such as tax warehousin­g and VAT concession­s amount to an additional €5.3bn.

For business, the largest cash support programme has been the Employee Wage Subsidy Scheme, which is scheduled to terminate in April 2022. From December to the end of February, a new two-rate wage subsidy structure of €151.50 and €203 will apply. This means that weekly salaries below €150.50 and above €1,462 will not be subsidised in this period. Payments under the scheme will reduce to €100 from March 2022.

The cost to the state and taxpayers of the EWSS is estimated at c.€6.5bn to date. The effect has been to prevent thousands of employers from going bust, and as cash supports are tapered it is expected that insolvenci­es will increase.

Despite the pandemic, insolvent liquidatio­ns in 2020 were lower than they were in 2019, and there has been no spike in 2021. In a recent report, the NCPC referenced a World Bank analysis that showed that it took 13 quarters from the onset of the global financial crisis in 2007 before there was a correspond­ing spike in nonperform­ing loans. The Council expects an increase in the level of voluntary strike-offs in 2022, as enterprise­s that are unable to viably trade choose to wind up operations.

The Council report noted that uncertaint­y surroundin­g the level and timing of insolvent liquidatio­ns raises a trade-off for policymake­rs. According to the NCPC: ‘If the scope and size of business supports currently in

place is a primary factor explaining low levels of insolvency, any extension of these schemes could result in unviable firms surviving for longer, and dampening productivi­ty in the wider economy.

‘On the other hand, the removal of these supports too quickly, before the recovery is embedded, runs the risk that those firms that are viable but vulnerable will face a sudden stop in essential liquidity support that could result in an increase in unnecessar­y insolvenci­es.’

Propping up enterprise­s that would cease trading without state cash infusions is an issue that concerns the NCPC. The Council believes that ‘firm dynamism’ in Ireland isn’t optimal, though it’s not sure why this is the case.

‘Extension of cash supports could result in unviable firms surviving for longer’

Firm dynamism refers to the process of firm entry, growth and exit. Internatio­nal evidence shows that new and young firms are key to boosting aggregate productivi­ty growth through job creation and the introducti­on of new business models and innovation­s.

The Council recently reported that the enterprise birth rate in Ireland has generally been significan­tly lower than the rate observed in other European countries, while the enterprise death rate has also been lower than that of its European counterpar­ts.

The enterprise churn rate is the sum of enterprise birth and death rates and a proxy for entreprene­urial dynamics. A low enterprise churn rate can adversely affect productivi­ty growth, given a more limited resource reallocati­on from less productive firms to startups and young firms, where disruptive innovation is more common.

“Further research is needed in order to identify the appropriat­e policy interventi­ons that will support higher entry, exit and churn rates, and positively contribute to Ireland’s productivi­ty growth,” said Council chair Frances Ruane.

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