The Irish government will examine closely the July stimulus package announced by UK Chancellor Rishi Sunak as it prepares its own strategy to restart an economy emerging from lockdown.
The eye-catching measures in the UK include a cut in the VAT rate for hospitality and tourism sectors from 20% to 5% and an eating out voucher worth up to €10 for diners. Hospitality businesses in Ireland are already looking for similar actions here.
However, the Irish package should be wary of prioritising measures that channel supports through consumers.
The first consideration for the July stimulus package has to be to decide on the objective. Then individual elements have to be consistent with that objective with as much impact as possible while minimising the administrative burden and the potential for crowding out private spending.
In my view, the objective of the stimulus package is to enable as many micro, small and medium-sized businesses to survive through this year and get as many people as possible back to work before confidence can return and the economy begins to function again.
There is little evidence that the difficulties currently experienced by restaurants, hotels, bars, and tourist amenities is a lack of demand. Businesses in these sectors are struggling with the capacity constraints and costs associated with the Covid regulations.
Those nervous about dining out may not be persuaded by discounts or vouchers and those already eating out do not need to have their meals subsidised. It is important that public money is not used to fund activities that are already occurring.
On social media, there are reports already of restaurant customers in the UK planning to game the new voucher system. It allows a 50% reduction in bills to a maximum of £10. So three bills of £20 is more beneficial to the customer that one bill of £60. It’s unclear how this helps restaurants.
There is also an administrative burden on government to process these vouchers and make payments to each restaurant.
What businesses need is support to survive through this difficult period so that they are still there when some normality returns. A cut in VAT, where this is not passed on to customers, could help a business’ bottom line. However, VAT rate reductions are notoriously difficult to unwind and always prompt calls from other sectors for similar breaks.
Since VAT is a ‘pass-through’ tax that is paid by businesses on their supplies and charged by them on their sales, reductions are impactful where they reduce the overall cost to customers. In response to a typical demand-led economic shock, this may be useful to stimulate demand. This is not a typical shock.
The July stimulus package should focus on getting cash into businesses directly. The difficulties being experienced by businesses in the hospitality and tourism sector are created by Covid regulations to keep customers and staff safe.
Reduced capacity undermines the viability of many restaurants, bars, and hotels. There are additional costs for example for signage, deep cleaning, masks and sanitiser, Perspex screens, refitting, staff training, and online booking facilities. Appropriate ventilation has to be improved or installed.
It is to these issues that the stimulus package must be targeted. This means extending the restart grant which currently provides amounts of between €2,000 and €10,000. Specific breaks such as VAT rebates on expenses related to Covid refits, screens, and cleaning products and services, for example, would also help.
The wage subsidy scheme should be extended until at least the end of 2020. There should be an emphasis on ensuring those let go during the crisis and the first to be rehired. It is important to ensure that workers’ wages and terms and conditions are not undermined due as they or new staff are taken back to work.
Easier access to credit will form part of the stimulus package. This has to be at a lower interest rate than currently available. A state-backed scheme, even if administered through the banks, has to find a way to pass on historically low rates to businesses.
The state can currently borrow at close to zero per cent. There is no reason businesses should be charged rates in excess of 4%. A targeted loan scheme for essential Covid related business needs should have a low margin, if any, and provide effectively zero or close to zero interest rate loans.
The longer-term National Economic Plan, which will be published with the budget in October, will need to address bigger challenges of future economic recovery and competitiveness. The job for this month is to get liquidity into struggling businesses as directly and quickly as possible to keep them afloat.
Dr Declan Jordan is Senior Lecturer in Economics at Cork University Business School