John Moran: Politicians must write the recovery plan, not bankers

But SMEs have suffered losses of perhaps up to €9bn because we asked them to close, not because they all had poor business models. Without grant aid for these huge losses, only the biggest will survive.

What will be the social cost of such a laissez-faire policy under which only the strongest survive?

Government interventions so far have not worked and thousands of people have not yet been rehired. Worse, crippled by unpaid bills and lost revenue and facing reduced revenue and new bills, firms are giving up trading daily and letting staff go.

By contrast, in Denmark wage subsidies accompanied by a rapid and generous compensation for losses have held unemployment rates around 5%. Their economy is forecast to shrink by 3% this year compared with the contraction here of up to 9%.

This is our last chance to get it right.

To succeed in reversing job losses in our small businesses which employ 1.5 million people we must avoid using the wrong measures and targets, and then we have to use the right tools. You cannot stimulate business spending by offering loans they know they are too weak to pay back.

Piling on debt or deferring tax bills doesn’t restore outsiders’ confidence either and trade credit dries up too. That is why interventions that mainly involve loan packages are destined to fail.

At SME Recovery Ireland, we recommended using zero interest rate debt that is guaranteed by the Government so that billions of outstanding bills can be repaid once they prove their losses to the Revenue and pay their bills.

It might seem like precision surgery but that is how not to waste valuable firepower. It is a stimulus investment where we get more back than we spend. Some firms might still fail but having them pay their bills will save others and boost the economy. It means taxes like Vat are paid. And unburdened by legacy Covid debts, resilient entrepreneurs can move on and start new businesses.

For the remaining months of difficult trading, further subsidies and changes to examinership rules will be needed so that good firms in the right sectors can survive.

In “normal” recessionary times, government stimulus boosts demand by putting money for spending into the pockets of many like increasing pensions or cutting income tax or using tax measures to bring down the cost of items so that they are cheaper to buy.

But, this is no normal recession. Extraordinary times require extraordinary measures.

The uneven hits to households of this crisis require a much more targeted government response. Large sections of the population have not lost income but confidence. Household saving increased €4.5bn in April and May to an all-time high of €118bn.

Give those savers more money and they will just keep saving until they believe that tomorrow will get better and job losses will stop.

Giving money instead to those who have lost income but will spend it – because they have to -- stimulates the economy. Ambitious and targeted grants to get businesses back on their feet and using wage subsidies will get people re-employed.

When businesses restore their confidence, their owners will employ people, pay their outstanding bills and suppliers will give them new credit. When workers are confident they will not lose their jobs, they will spend and not save their wages.

Laurence Boone, chief economist of the OECD, has pointed out that “this is not a shock that central banks alone can address”. Governments need to act too.

ECB actions are ensuring cheap funding for banks, large business and governments. By helping governments borrow cheaply, the ECB wants to see them act with sufficient scale to shelter their economies from the worst of the storm.

So let’s not mince words. We can borrow. We should borrow. And it will take billions of fiscal stimulus to respond correctly to counteract the very worrying forecasts of severe economic recession.

If we are penny wise and pound foolish, this recession will be a long deep one. Without growth to help pay back the Covid bills, we will be facing years of austerity. Banks and suppliers will start seizing assets, mental distress levels will shoot up and shop fronts will be boarded up in towns and villages all across Ireland.

There is still time for our politicians to act so firms keep selling, people buying, jobs are recreated and taxes keep flowing for the government to pay for public services.

But above all, it is not just about the economy. Many small firms deserve solidarity and our support for the social function they play in our local communities, rural and urban, not just for their profits and taxes. Think of the child carer, the rural taxi driver or the local shop or pub to understand what I mean.

In the words of Ed Honohan, Master of the High Court, investment in social infrastructure, as is the case for farmers with the CAP, is a “political goal worth breaking the rules of a free-for-all marketplace”.

If our politicians get this right there is real hope. July may see the most important Covid infrastructural investment for Ireland. A systemic spend where the return is measured by how it maintains social cohesion and stimulates the economy not just by an interest rate or the likelihood of getting the money back.

The politicians who write it will go down in history. Their choices will determine how history is written. It is why politicians must write the recovery plan, and not bankers.

John Moran was secretary-general of the Department of Finance between 2011 and 2014 and is chair of SME Recovery Ireland.