How much is enough?

Times of Malta

Opinion

30th March 2020

This question is often put to me by concerned and interested observers wondering whether the three aid programmes so far announced by the government would be enough in their cumulative impact to restore the country’s economy to its normal state of sanity and growth, as experienced until the COVID-19 pandemic turned everything  upside down.

The simple answer is that we don’t know. Nobody knows.  There are three basic unknowns which render a proper assessment of the size of the problem impossible.

So equally impossible is any certainty regarding the type and dosage of the required medicine. 

What’s for sure is that we need to have a very deep war chest and have to be ready and flexible to dose the solution commensurately, as the size of the problem continues to emerge.

The three basic unknowns are:

1. How much resources do we need to channel to the health sector to ensure it stays ahead of the curve as the pandemic reaches its peak and then hopefully starts to recede gradually?

2. For how long do we need to keep the productive economy largely frozen as many workers, consumers and clients are forced by circumstances to live within their household walls?

3. Once we get over this scare and we start the process to normality, what would be the gradient of the recovery process?

The first unknown will have a substantial impact on government finances but contribute to economic growth as government has to deliver more services. 

The other two unknowns have a huge negative impact on both government finances as well as the general economy as economic activity freezes and economic units lose huge chunks of their operational revenues.

It is difficult to escape the conclusion that 2020 will register both a contraction in the economy, i.e. register negative growth, as well as substantial shift from surplus to deficit in government finances. 

Government programmes so far have given first aid support

What we cannot be sure of at this stage is the intensity of such shifts. Some models I have seen show that if the crisis stretches over four months i.e. March until June, the eurozone economy could shrink by 10 per cent in 2020.

I think this is quite plausible for our circumstances given our exposure to highly impacted sectors like tourism, entertainment, financial services, and construction, and assuming that it could take six months to restore consumer confidence to its normal level.

Should we worry? Of course we should; there are too many uncertainties not to worry. Should we panic? Absolutely not.

We must do whatever it takes to keep our workforce healthy and to help our economic operators to stay alive until we put this crisis behind us. The size of the budget deficit needed to achieve these objectives is quite of secondary importance and we have ample debt capacity to borrow whatever needs to be borrowed to see us through.

It is evident that government is the only entity that can do what needs to be done to get us out of this crisis with the least damage possible and in a situation where our economic operators stay healthy enough to return to full activity and efficiency.

Government programmes so far have given first aid support. The first package provided liquidity through deferred tax payments. The second and third versions extend payroll support to the most impacted sectors.  They also provided for highly needed contingent obligations by the state to enable banks to extend liquidity support to borrowers without risking their own (banks) state of health.

Nobody knows if this is enough. My feeling is that the first package was absolutely needed and easy to implement.  It is also indiscriminate among business sectors. The second and third packages have a hint of instant cooking and discriminate among sectors. It was put together with urgency with understandable focus on protecting employment in the most impacted sectors.

At some stage one has to consider whether payroll support is sufficient or indeed the most effective way to go about it.

If difficulties prolong, the call for more will become irresistible. At some stage one has to consider whether payroll support is sufficient or indeed the most effective way to go about it. While most economic outfits should be able to absorb a bad month, few are in a position to withstand a series of bad months where most or all of their operating revenues simply evaporate.

For those outfits that do not qualify for the payroll support schemes announced, or wish to opt of them and are manifestly being impacted by the crisis through lower or no operating revenues, the government may have to consider the introduction of revenue support schemes.

Basically this would involve the outfit demanding support by explaining how their revenues are being hit and government considering grants up to 50 per cent of the revenues declared in their VAT returns for the comparative period of previous year 2019.

The remaining 50 per cent would reflect the direct expenses that would be saved and the profit margins that economic operators have to forego.  This would always be subject to qualifying enterprises committing to keep on their entire workforce.

This scheme would protect the job safety of those not enjoying payroll subsidies of current schemes and enable economic operators to stay broadly current with their other operating expenditure like rents, insurance, energy bills and other overheads.

Failure on these payments would otherwise deepen and prolong the recession.

We need to be ready for the worst and believe that whatever the financial impact experienced, we can recover all setbacks over the medium term as we bounce back into activity to reclaim and extend our full economic potential.