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Brian Fallow casts an eye over policies targeting SMEs that are emerging as a key electoral battle ground

Brian Fallow casts an eye over policies targeting SMEs that are emerging as a key electoral battle ground

By Brian Fallow

One way of thinking about economic recovery is that the challenge is to avert a vicious circle and engineer a virtuous one.

The vicious circle goes like this: As wage subsidies end and the euphoria of early release from collective home detention fades, unemployment and underemployment will climb and precautionary saving will increase. Businesses confronted by shrinking revenues will cut costs including payroll. Rinse and repeat.

The alternative, virtuous circle recognises that bolstering household incomes and consumer confidence is the essential precondition of business investment and hiring. But businesses as employers are the main providers of household incomes. So public policy has to support both the chicken and the egg, so to speak.

The latest consensus forecasts compiled by the New Zealand Institute of Economic Research have private consumption contracting by nearly 10% in the current March year.

And given the dominance of service industries in both GDP and employment the latest BNZ/Business NZ performance of services index also makes grim reading. It is already well below the levels reached in the last recession and as bad as the comparable indicator for the United States, though better than Australia, the Eurozone, the United Kingdom or Japan.

Small and medium enterprises (officially defined as enterprises with fewer than 20 employees) collectively account for 28.4% of all employees, according to the most recent business demography statistics, and 46% in the case of the hospitality industry.

No wonder, then, that policies targeting SMEs are emerging as a key electoral battle ground.

“Small business owners who create jobs will be the heroes of this economic crisis, in the way that our nurses, doctors and all five million of us who stayed home were the heroes of the health crisis,” declares the National Party.

Its new leader, Todd Muller, says he will make himself Small Business Minister if he becomes Prime Minister.

The biggest-ticket item in National’s policy offering so far is a GST refund for businesses that can show their revenue has dropped more than 50% across two successive months because of the lockdown.

“If they can demonstrate that, then they would be able to claim back the GST they paid during the six months to 1 January 2020, up to a maximum of $100,000,” it says.

Beyond that there is scope for a soft loan of up to $250,000 repayable over five years for businesses which paid more than $100,000 in GST over those six months.

National estimates 160,000 businesses would be eligible, at a cost of $8 billion.

The Government, for its part, has already enacted a number of business-friendly tax measures, including a loss carry-back measure to provide fast cashflow relief (estimated at $3.1 billion) for businesses making a loss during the period affected by Covid-19. It enables tax refunds to be paid before the loss year has finished to offset any income tax owing for previous profitable years. It does not forgive tax, just brings forward the ability to utilise tax losses.

National’s GST policy is presented as retrospective relief to businesses. It evidently sees GST as a tax businesses pay, rather than one they collect from end consumers.

The policy is quite different from the International Monetary Fund’s suggestion last year of a temporary cut in the GST rate aimed at encouraging consumption when that has slumped, in a way particularly useful to what it quaintly calls liquidity-constrained households, aka the poor. The suggestion received short shrift from Finance Minister Grant Robertson at the time.

The loan component of National’s GST policy is rather at odds with its assertion, when justifying the grant element of the scheme, that “Offering loans to businesses already struggling with cashflow doesn’t help in the longer term when cashflow and turnover are going to be affected for some time.”

It can be compared to the Government’s Small Business Cashflow Loan Scheme, run by Inland Revenue, under which firms with up to 50 full-time equivalent employees can borrow up to $100,000 on soft terms. The scheme, which so far has seen more than $1.2 billion lent out, was introduced following the very limited uptake of the earlier loan guarantee scheme, offered via the banks.

The earliest business-friendly tax measure the Government introduced in response to Covid-19 was to reinstate a depreciation deduction on commercial buildings at an estimated cost of $2.1 billion over four years.

Better targeted for an economy with a low capital-to-labour ratio and correspondingly weak productivity was the later decision to lift the threshold for the immediate expensing of capex to $5000 from the $500 it has been stuck at for years.

National says it will go much further and lift it to $150,000 for two years, to match Australia’s Instant Asset Write-off Scheme. It reckons the cost of the policy would be about $1.4 billion over four years.

National’s third and cheapest SME-targeted policy, JobStart, would pay businesses $10,000 for every additional new employee they take on.

It would be available to all businesses but capped at 10 new employees per business and, at least initially, at $500 million overall.  Recipient firms will have to sign a statutory declaration that the job is genuine, permanent and offered in good faith – an acknowledgement of the potential for rorting – and will only be available to existing businesses.

The problem with schemes of this kind is that they do not increase aggregate demand for labour, or the amount of work there is to be done. The risk is that the subsidised job comes at the expense of an existing job elsewhere.

The Government’s existing Mana in Mahi scheme and the Budget’s $1.6 billion Trades and Apprenticeships Training Package are less vulnerable to that criticism inasmuch as they are targeted at addressing skill shortages.

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15 Comments

And for companies that are doing well now we've been going a few weeks from lockdown - it seems a bit unfair?

The raising of capex to $5,000 isn't gong to help much for us - $500,000 would do though.
Or raising significantly the R & D tax break.

And rather than pay us $10,000 for each new employee, just make it easier to fire the useless ones.
If we could find some good staff we would hire in a heartbeat. But so many are deadbeats & no hopers. Just today we have an application from an ex teacher with a physics degree, wanting to do hard factory work - why would we take the risk? They might turn out to be a good hire, but.....

I'd rather invest in new machinery to make the existing staff more efficient, than hire more labourers.

My father's sister was man powered from a clothing shop assistant position in England to working a lathe producing armament parts, at the beginning of World War II. She did so until the war was won.

'just make it easier to fire the useless ones' ... never been an easier time. Windows of opportunity don't usually stay open for long.

Why make it all so complicated?

Why not just refund income tax and GST paid by individuals and businesses under a certain size? Refund exactly what was paid in cash last year, do it month by month.

These ultra complex schemes are just what small businesses do not need. They distract their best people from their job at the worst possible time.

The economy just needs money now. This should be the priority. The patient is in ICU, so get the drip in immediately. Do not bugger about.

Why is it that government bods make things so complicated and so delayed that they are doomed to fail?

Why not just lower taxes? I mean tax is essentially an expense from the perspective of a business.

You know the answer to your question Roger - greed.

If they collect less tax, there'd be less of them. When people realise that they don't actually need that many of them in the first place, they won't have a mandate to expand the public sector to the point where everyone alive is a comms staffer. It's entirely a question of self-preservation.

An income tax rebate approach has the advantage of an inherent triage filter in targeting historically profitable businesses that are more likely to survive and grow future jobs.

Spot on, get cash back into the system along with confidence.

Spot on, get cash back into the system along with confidence.

Words of Wisdom from the Oval Office:

"If we stop doing the Covid testing then we would have very few new cases of the virus"

That's a bit like if we stopped doing pregnancy tests then the population birth rate would drop.

...about as intelligent as our govt harping on about “cases” on a daily basis when less than 5% of the population was tested. The true number, based on Oxford studies, was likely to be 10x higher. Yet, they portrayed the daily reported cases as a definitive number...quite comical and farcical at the same time.

Two new cases today in NZ from UK travellers. A large number of NZ residents are awaiting flights back to NZ from India where C19 underreporting is rife and the govt has largely given up suppression attempts. And our fragile front line defence is in the hands of a health minister described today as 'like a first term MP out of his depth with incompetence shining through, unable to answer questions in detail when he should be across the issues, fobbing questions to associate ministers and staffers and looking uninterested'. When lefty stuff.co. is mounting an excoriating criticism of one of Ardern's key ministers we should be very afraid.

No one should worry as till election time government will be throwing lot of money MORE as National will too come out with so called proposed liberal policies (Knowing very well that they are not winning, so no harm in promising and forcing Labour to match and to do that labour will have to print more and throw more money as a result will goof up with finance and opportunity to national).

Even now small business who have suffered are having problem but many others have made money because of government's generosity and easy money in market.

Anyone working in Spotlight, K Mart, Stores in Mall..... will vouch the amount of demand reflected last months was much more than expectation - more than Xmas period and in no way reflects recession which many are talking. At the same time, those who have lost their job is a depression for them.

Many business are not doing well specially in city centre and tourist destination but at the same time, their are many others who have done excellent because of easy and free money circulation (Though they too are worried for future when all freebies by government and in 2 or 3 months).

Wait and Watch as till now everything is covered by government ...be it wage subsidy, money to businesses, mortage defferal.....

Nobody yet - including Fallow - has addressed the bigger issue.

Why is this?

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Days to the General Election: 20
See Party Policies here. Party Lists here.