Jim Power: SMEs need support despite 'zombie' status

'Corporate social welfare' has been part of the policy environment since covid, and it will be hard to put that particular genie back into the bottle

Jim Power writes: 'There will be some particularly challenged businesses that will struggle to survive the combined pressures.'

In a recent column in this newspaper, I expressed confusion about the real health of the Irish economy.

Public finances and exports are all looking quite strong and healthy now, but recent experiences I had with SMEs across a variety of sectors told me a different story about the economy.

Issues such as labour availability, labour costs, energy costs, and a challenged consumer were cited to me, and I couldn’t disagree with the sentiments expressed. It is obvious that the cost environment is very challenging for many small businesses now, and many are finding survival very challenging.

Earlier this week, the Department of Finance published its stability programme update. I detected a sense of confusion that matches my own.

The update suggested that data published since the department’s autumn assessment present mixed signals, but on balance, the evidence points to an economy that is in reasonable shape, at least in aggregate terms.

It pointed out that some areas of the economy, especially the labour market, remain resilient, and that inflation is easing faster than anticipated. However, it pointed out that there has been some loss of momentum in areas such as consumer spending and private sector investment.

This looks like a pretty accurate assessment, at least in my judgement.

The SME sector is feeling these headwinds, for reasons already mentioned. However, the repayment of warehoused revenue debt is the latest challenge facing many small businesses, as it is due to commence on May 1. The latest data from the Revenue Commissioners suggests that the warehoused debt outstanding stands at €1.58bn, with 37,200 firms or 70% owing less than €5,000. However, 4,800 firms owe €1.35bn, and these are the ones to be concerned about.

All companies will have to agree a repayment schedule with the Revenue Commissioners and the debt can be paid back over a timeline that suits individual requirements, or at least that is the theory. Thanks to a government initiative, the debt is now attracting a zero-interest rate.

One of the interesting and somewhat perplexing revelations last week was the fact that with just a week to go to the May 1st deadline, around one third of Irish business had applied for the Increased Cost of Business Scheme, which was announced in Budget 2024.

This scheme is based on a once off payment calculated as a percentage of commercial rates. The actual payments are too small to make any real difference, and perhaps this partly explains the lack of take-up, given the effort involved to apply.

Undoubtedly there will be some challenged businesses that will struggle to survive the combined pressures. The trade unions do not buy into the notion that a lot of businesses are in trouble as they seek to justify and ensure that labour measures such as the move towards a living wage; increased sick pay; auto enrolment and PRSI increases are delivered upon.

The trade unions would say that of course as that is their role to represent the conditions of their members. However, it is equally valid for business interests to point out the challenges they are facing, not least due to state initiatives that will seriously increase the cost of labour and the general cost of doing business.

Recent data from PwC show that insolvencies rose by over a third in the first quarter of 2024 compared to a year earlier, with liquidations making up 85% of all insolvencies. This was dominated by SMEs, with hospitality and retail feeling pressure.

It has become clear since covid that corporate social welfare has become a significant feature of the policy environment, and it will be difficult to put this genie back in the bottle.

In a post-covid world the business environment is strange and there is considerable dislocation at many different levels.

It is possible to argue that ‘zombie’ firms are being kept alive through State support, but it is not easy for policymakers to judge if a firm could be described as ‘zombie’ or not. Normality will return, but meanwhile if State measures make life more challenging for the very important SME sector, support should be forthcoming.

• Jim Power is a leading Irish economist