CV-19 Subsidies: A House of Cards

Twelve weeks after the end of World War II, Britain voted out their wartime leader Winston Churchill and elected the Labour candidate Clement Atlee as their new Prime Minister. His Minister for Health Auerin Bevan set about creating the welfare state and arguably the most significant institution in British history - The National Health Service (NHS). Despite resistance from within his own party, the Tories and the British Medical Association, the National Health Service Act 1946 was passed nationalising more than 2,500 hospitals within the United Kingdom. When Bevan was asked how he was able to get self employed doctors to agree to becoming employees of the NHS, his reply was “by stuffing the doctors’ mouths with gold.” What he meant was that the NHS would allow some doctors to continue seeing private patients if they also accepted NHS patients. This model of allowing doctors to treat both public and private patients is also in use in Ireland today.

Seventy years later, with similar war time interventions and emergency legislation where we await the next set of restrictions handed down from a Minster with no parliamentary oversight and enduring what has been described as the longest lockdown in the world. Aside from a handful of PR gestures and individual protests, the small business community have been overwhelmingly supportive of government restrictions. Contrast this to the pushback in 2005 when the then Minister for Justice Michael McDowell attempted to legislate for continental-style bars offering a combination of food and drink. So concerned were the Fianna Fail backbenchers for Publicans who "have taken enough punishment" that the proposal was dropped. Today, it appears NPHET has succeeded where McDowell failed. With the introduction of €9 meals and the 15 person limit, the Irish pub today is more reminiscent of the café bar culture that Michael McDowell envisaged 15 years ago. When pubs and other non essential retail were briefly allowed to reopen, there were so many bizarre and counter-logical rules that you have to ask how has all of this been accepted without challenge?

Last week, the Revenue Commissioners published their report - A Year of COVID-19 Tax Supports - March 2020 to March 2021. The report outlines the extent of CV-19 supports administered to Irish businesses and individuals. The total value of these supports up to March 2021 is €9.1 billion and counting. The EWSS and TWSS account for €5.4bn, Debt warehoused €2.3bn, CRSS €426m, €1bn others.

The Irish government have again taken a leaf from Bevan's book by stuffing the Irish people's mouths with gold in the form of CV-19 tax supports. This is why there is such a high level of compliance and if one thing is certain, in Ireland, the success or failure of lockdowns will not be due to a lack of compliance. The harsh reality is that many businesses are better off financially from CV-19 subsidies than if they were open and fully trading. Take the CRSS as an example, the scheme works by giving furloughed businesses 10% of their 2019 sales (not profit) up to a maximum of €5,000 per week, but many of these businesses weren't making 10% net profit pre-pandemic, now they're getting 10% of 2019 sales for staying closed. With no staff or customers to manage, no opening or closing times, no logistics, tax liabilities warehoused, rent and loan moratoriums, restart grants and weekly PUP payments. These are all buffers that are applying downward pressure on company insolvencies and creating a dried tinder of zombie businesses. Unfortunately, the story for many of these businesses is that the decline was already underway pre CV-19 and those underlying weaknesses will be exposed once those buffers are removed and the dried tinder will be ignited.

On the upside, the Irish government have repeatedly said that that there will be no cliff-edge cut off to pandemic supports. Minister for Finance Paschal Donohoe, in a letter to the economist last week, repeats the case for unprecedented Government supports.

What we could be seeing now is the beginning of a period of exceptional levels of borrowing by Governments and printing of money by Central Banks. This in itself could prompt economic growth in the short term and allow the Government to carry out major infrastructural projects, some of which are badly needed, but the risk is that it has potential to devalue currencies and cause massive increase in inflation as the Tánaiste Leo Varadkar has previously alluded to.

As society begins to re-open, pent-up consumer demand and household savings, which are at their highest levels since records began, will start working their way back into the economy. This is certain to have a short term economic impact. The Revenue Commissioners have also indicated their willingness to enter Phased Payment Arrangements (PPA) on tax liabilities at a reduced rate of 3%. So, for now, the logical choice for Irish businesses is to continue availing of the subsidies and reassess if they are a going concern when supports are rolled back on the 30th June.