Comment
On Saturday May 2nd the Government adjusted its support programme for Irish business. Monday May 4th, on trend, the Irish Times released it without journalistic analysis. It was left to the IBEC chief, Danny McCoy, in an opinion piece, couched in the diplomatic language of the supplicant to point out that it’s a load of bollocks. Except he didn’t use that language, but I do because it is well past time to say it. The Government is making a bollocks of the recovery. Here I outline why in a piece that will circulate directly to presenters and producers to get off our backsides, shed the green jersey and to get at this timidity. There is no room for half measures, there is too much at stake. For all of us.
Analysis
Be clear the pivot point for the Irish economic recovery is not what has happened so far, but what happens next. The flood and fracture stage is now upon us, as employers drown in waves over coming weeks, Government life supports underwhelm and the NPHET, essentially, wants to keep the economy closed into late summer.
It has happened before that policy making failures prolonged the depression and the collateral health impacts caused by stress and bankruptcy. There is an opportunity not to repeat the past, but it appears to require a U-turn in the culture of suspicion among those shaping the calculus.
Hundreds of thousands of workers are on emergency cash, but how many of their business employers are failing without the buoyancy of revenues? ISME data reports 28% of firms laid off all staff with 11% ceasing trade. By the end of June, you can add another 34%, completely out of cash. On this data it is not unreasonable to expect one in four firms to go out of business and fail by then. It is inevitable that many business owners face bankruptcy. The scale appears lost on the Government. Overall, the economy is facing into a fall of between €35bn and €50bn, that is the scale, but on the ground the impact is to wipe out swathes of SMEs with a corresponding bulge in debt collection, stress and, in the extremis, in bankruptcy. Over the weekend the Government added an increment to its support, an 80% government guarantee scheme for bank loans to SMEs. Capped at €2bn, it represents an average of €11k per firm, or about one euro in seven of the average owed to creditors by the average SME.
Over one million workers who represent two-thirds of job numbers in the Irish private economy and which account for three-quarters of the workforce outside of Dublin, are employed by 180,000 firms with less than 250 staff. This is the backbone of the indigenous Irish economy and, bear in mind, over 90% of SMEs employ 10 people or less. Foul this up and it all ends up in a negative feedback loop; less jobs, less tax revenues, less spending and as a giant fatberg of non-performing loans that will slither its way through the sewers to the banks who will react by tightening credit and sinking their teeth into marginal customers, freezing them out. This is going to retard economic recovery, plain and simple unless it is vigorously addressed. By not bringing a bazooka, the Government is, in effect, damaging the economy and its tax receipts in the years that follow.
After the GFC the private economy was thrown to the wolves of austerity, emigration and a vicious credit crunch. It took five years to exit the Dickensian laws that sought to punish indebtedness and business failure as if a punishment of Divine Providence. But even then, the Personal Insolvency Act was loaded in favour of banks who were allowed to veto solutions. Twelve years later many Irish families, most of them in the private economy are still under the cosh, still suffering under the doctrine of moral hazard. This is the infrastructure that will be applied to the ugly wave of distressed debt that is coming at us fast. If you believe the Global Pandemic Crisis (GPC) is different because of a zeitgeist that we are all in this together, because of a shift in the Irish political zodiac or because of a new found enlightenment towards business failures, just ask the nurse to stop reading now.
Nothing has changed. Follow the money and the T&Cs. This is the phoney phase before the banks once again turn on the weakest. It is the iron rule of banking. The front line for a jobs-rich recovery is in the SMEs but the Irish Government, whose response is led by a former lending official has, thus far, brought prayer, not purpose to the battlefield.
The countermeasures for SMEs have generated a trickle of cash relative to the size of the indigenous private economy. Take Irish GNI of 2017 as a reasonable benchmark, the restart grant, limited to €10k each and capped at €250m is about 0.1% of GNI. Working capital support loans are limited to 0.2% and credit guarantees on bank loans to 0.85%. Do the sums. It is barely over one percent in total.
Here are ten items for SMEs that could be considered in consultation with business and trade union leaders:
- Bypass commercial banks completely with their pernicious personal guarantees and underwriting by weaponising the SBCI to impose itself. There is no time for red tape, for application bottlenecks, business plans and opaque credit committees, short term cash is needed yesterday.
- Funds ought to be drawn down on an Accountants Certificate and equal to at least three months revenues using 2019 accounts, up to a credible limit.
- Short-term money ought to be at zero interest rates and repayable over two to three years.
- Longer term loans up to ten years should be at sovereign borrowing rates, unsecured up to a couple of hundred thousand Euros and backed by Government guarantees no matter who administers the loans.
- In terms of scale, start thinking like the Germans and the Americans who’ve committed fiscal supports at 10% of GDP. Irish Government support needs to simplify and scale up, potentially to over €15bn across all business sectors big and small.
- Get in investors, light the fires of expansion. Make it highly attractive for fresh capital. Lift Entrepreneurs Relief to €15m in gains for equity investment in SMEs including from key employees with cash and ambition. It will cost nothing now but limits future CGT to 10% on gains when businesses are sold in years to come.
- Allow SME owners to draw down 25% tax free cash immediately regardless of age from accumulated pension pots provided it is invested in the business. Ditch the pious pension rules, this is an emergency source of billions in cash.
- For a short time cut the VAT rate by a fifth for businesses that prove they are settling invoices early to discourage cash hoarding and to speed up the velocity of money circulating to firms barely holding on.
- Amplify expert assistance in reviving businesses, bypass the local enterprise offices bottlenecks, open up the market to all business consultants in Ireland by providing a Government voucher for a few grand per business to hire in the smarts.
- Reform employment termination laws so that businesses who cannot fund termination payments are not incentivised to go into insolvency or administration to force a Social Insurance payment.
But we need to be brutally frank; in the ether, reflected in large parts of the media and in the knockabout of our political theatre, there exists an ingrained suspicion that the indigenous Irish small business is cover for a dodge. There is a preference for the wealthy foreign business with big chequebooks, strange names and great photo ops, anybody but the next-door neighbour, despite the local job creation from local capital and local risk taking. For the local risktaker there is a quiet celebration reserved over the rim of the pint glass when failure falls like rain.
This is an old bias but still infects those deciding the calculus of support to the private indigenous economy from the safety of the castle keep and its lifelong income. It is this wilful blindness that will be the single greatest cause of policy error unless it is openly challenged. It is time to bury it along with Covid-19.