Immediate action needed: four ideas to alleviate economic slowdowns

Searching for ideas to alleviate sudden economic slowdowns is a perpetual concern for governments. As the world works to manage the COVID-19 crisis and a possible slowdown, a number of governments have announced preliminary measures in recent days and weeks, ranging from providing automatic rollovers of debt to small businesses (for example, Italy and Germany) to extending unemployment insurance equivalent to nearly 100 percent of wages to all laid off workers (France).

The urgency is warranted, as similar questions were asked during the global financial crisis a decade ago. An analysis of Doing Business data reveals four ideas on how to stem the negative effect on workers and businesses.

First, governments may delay the collection of certain taxes to provide liquidity for struggling businesses. Most immediate is delaying corporate income tax payments. In most countries, corporate income taxes account for only a few percentage points of tax revenue. Yet delaying payments by a quarter or two gives immediate breathing space to the private sector while keeping intact fiscal balances.

Another idea is to speed up value-added tax (VAT) rebates for exporting businesses and conversely to delay the collection of VAT from companies that import from abroad. This measure leaves more liquidity in the hands of traders and is especially relevant for European Union members. Greece, where it currently takes 31 weeks to get a VAT refund for a capital purchase already announced such measures. Italy, at 63 weeks, is the highest in the European Union, while in Denmark the same refund takes 10 weeks and in Germany only 5 weeks. China has just started allowing VAT refunds for capital purchases, helping all firms increase liquidity - not just traders. 

A second measure to lessen distress in small businesses is extending unemployment insurance to all workers that have been laid off. With this step workers are able to cover household payments, including mortgages, and support their families through economic slowdowns. Bulgaria and South Korea have implemented such policies, enabling them to pre-empt layoffs in affected sectors.

Not every country has unemployment insurance, however. In fact, according to Doing Business data more than half of the world depends on an alternative arrangement. Unconditional cash transfers would serve this purpose, especially if they can be done electronically.

Third, businesses that experience liquidity problems should be kept as going concerns. Yet a number of countries have insolvency laws – 76 out of 190 economies in the Doing Business sample - that would trigger foreclosure or receivership procedures after just weeks of illiquidity. These include a diverse range of countries from Albania and Bahrain to Georgia and Jordan. Countries that do not have reorganization procedures in their bankruptcy law may need to temporarily freeze the possibility of distressed businesses closing down.

Fourth, governments may need additional fiscal space, for example, for healthcare or social security. Procurement procedures can do just that, by prioritizing publicly-funded projects. Procurement agencies can be tasked to evaluate the existing pipeline of projects and select those that provide significant job opportunities without draining the budget. Conversely, projects that can be delayed would allow for the necessary fiscal resources to be redeployed. This job is easier in countries that publish procurement plans and regularly update them. In Latvia, for example, procurement plans for all contracting entities are made publicly available on the electronic procurement platform. In the United Kingdom, large contracting authorities such as the Highways of England prepare multi-year procurement plans that are updated on a rolling basis. The plans contain a detailed timeline for the award and execution of each project, alongside its estimated value. These plans allow government agencies to shift resources when needed.

These are all palliative measures, designed to ease the immediate burden on households and businesses. Should the current economic slowdown persist, bolder ideas are needed.