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.