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Seven things to watch in the Government’s economic stimulus plan

Smart Money : Vital decisions on wage subsidy, grants and VAT in the balance

This week the Government is due to announce its July stimulus – a package of measures to try to protect jobs and spur recovery.

But against the background of uncertainty on the Covid-19 trend, this is a tricky job.

A particular problem is that it is difficult to know how consumer behaviour will adjust in the months ahead, with big implications for many businesses.

Here are the key decisions ministers face and the vital considerations they have to weigh.


1. The wage subsidy: how long does it last?

It looks as if the extension of the wage subsidy will be the big ticket item of the stimulus. The Government has already hinted that the scheme, which pays up to 85 per cent of qualifying wages, will be extended from its current late August end date.The UK government has extended its scheme to pay up to 80 per cent of the wages of furloughed workers until the end of October.

Here the wage subsidy is also likely to be widened to take account of seasonal employees in areas like tourism and new hires. It remains to be seen if the qualifying criteria for affected companies, which include a 25 per cent hit to turnover, will be tweaked.

There are fears that this can encourage some companies to continue to operate below full capacity, There may also be assistance for companies to hire people back on a part-time basis, either through the wage subsidy scheme or separately.

The scheme has already cost €2 billion and so extension is expensive. It is likely that the scheme will continue to be generally available for some months yet and may phase out gradually in 2021, perhaps by reducing the subsidy or restricting the application to certain sectors.

It is seen as the key economic tool to get cash directly to companies, while also supporting employment. A vital goal will be to give certainty to companies on how long it will last. A plan to gradually phase down the Pandemic Unemployment Payment (PUP) is also expected. All the signals are that it will be phased out earlier than the wage subsidy scheme.

2. Credit guarantees: will they work?

Jobs minister Leo Varadkar has already published legislation to introduce this scheme, promised by the last government, involving state guarantees on 80 per cent of loans .

This has been generally welcomed by business bodies, particularly the easing of the rules originally announced in relation to a cap on the amount of guarantees for any one bank.

However business representatives also caution that the appetite for many companies to take on extra loans is limited, unless the terms are attractive.

Many don’t want more debt – and loan schemes announced earlier in the crisis have had a limited take-up, partly because some had interest rates of over 4 per cent.

The goal of the new scheme will be to increase loan take-up from the banks under favourable terms for businesses and to try to keep credit flowing.

A lot of discussion is underway on how this is all administered to try to boost take-up. A key issue will be the interest rate and terms offered by the banks – discussions are underway on this. Below market rates and some initial repayment breaks are anticipated.

An expanded export guarantee scheme to help companies selling abroad is also expected.

3. Cash grants - how much and to which companies?

A restart grant scheme, based on rate refunds, is in place, offering cash of between €2,000and €10,000.

However average take up is around €3,000 to €4,000 and not all qualifying firms are applying – only around three in five who would qualify have applied, according to sources.

Nonetheless it looks likely that this scheme,aimed at SME’s with turnover less than €5 million and employing less than 50 people, will be made significantly more attractive.

The goal here is to support SMEs who have faced significant ongoing fixed costs even as they remained closed or ticking over. It looks as if the cash limit on the grants will rise –probably to between €15,000 and €20,0000.

This means the links with previous rates payments will have to be replaced by some other mechanism. The grant may also be offered to somewhat larger firms and to some people running their own businesses who do not have a premises and so do not pay rates.

Chambers Ireland estimates that the average SME has faced fixed costs of €1,000 a week during lockdown and restart costs averaging €3,500 – with many also facing bad debts, the cash squeeze is getting worse.

An extension of the waiver on commercial rates for badly affected firms may also feature.

Legislation is also likely to underpin the warehousing of tax liabilities for badly-affected firms for up to a year – the Revenue are already applying this on an administrative basis. And the indications are that the current waiver on commercial rates for companies facing difficulties will also be extended, to give more certainty to firms.

4. VAT cut: will it happen?

There have been widespread calls for VAT cuts. But a general VAT cut may not happen – for now anyhow though final decisions are not yet taken.

There has been speculation of a cut for the hospitality sector. However some sources suggest that other ways of getting cash to firms may be more effective. The UK did announce a cut on the VAT rate for the hospitality sector for food and non-alcoholic drink from 20 per cent to 5 per cent until January..

The Government would fear that lowering VAT will not lead to more demand with many people still nervous of visiting restaurants, pubs and the like. And unlike the previous VAT cut for hospitality, this time the industry might not be able to afford to lower prices.

Some Government sources have argued that cash grants and the wage subsidy are a better route to support the bottom line of businesses – for now anyhow. This is one to watch. Some move for hospitality and tourism is seen as likely, via some kind of cash-back scheme to reimburse consumer spending, perhaps relating to VAT paid or via special vouchers. These would be designed to encourage demand – the economic issue is to try to avoid subsidising spending which was going to take place anyway.

5. How to boost state investment?

New public spending minister Michael McGrath is likely to announce some modest investment proposals – possibly involving schemes relating to town centres or other local programmes. Some “ green” projects are also likely to feature, notably sustainable transport and some big State companies like Irish Water may get the go ahead for new schemes, as in some cases these are ready to go. By their nature most investment programmes take time to get going – few are genuinely “shovel ready,” but there were also be signals of more to come in areas like retrofitting homes.

6. How to help those without work?

Because unemployment will be much higher as we exit the initial Covid-19 downturn – even though by then many people will have returned to work –the State will take a much more active role in the labour market.

As well as incentives like the wage subsidy scheme, this will include a range of new apprenticeship and job placement programmes, as well as training. Those who cannot immediately returned to work are likely to be given financial support to retrain.

The Jobs Plus scheme which incentivises employers to take people off the live register may be expanded a bit. We are likely to get a flavour of this in the stimulus programme, with more to follow.

7. What will it all cost?

This may take time to work out. There will be a big headline figure, and a lower exchequer cost.

A vital issue for finance minister Paschal Donohoe is likely to be to keep some firepower for later in the year, with the risk of a second wave looming and the danger of Brexit.