Falling through the cracks

There is a big hole in the Government’s support for the economy during this major crisis. So far Government aid has been aimed mainly at businesses which have had to shut down entirely, such as catering and aviation. For these businesses the furlough system makes good sense, effectively the Government is paying enhanced dole money to enable these businesses to avoid mass redundancies and speed up recovery when it finally happens. It also makes sense where there has been such a huge reduction in demand, such as clothing and other discretionary types of industry, where the maintenance of full production makes little sense. But the furlough system is a blunt instrument, which encourages businesses to lose the entire productive capacity of those workers who are furloughed, as they are forbidden to do any work at all.

Moreover, the furlough system or redundancies do not make sense in businesses which may have suffered some fall in demand, but which could keep going, producing and innovating at reduced capacity. For these companies the only support available is through bank loans, often at ridiculous interest rates.

State aid to enable business to continue for as long as possible through the Covid crisis is an essential bridge between where we are now and a resumption of normal economic life. the longer business is shut down,  the slower and harder it will be to resume. The Government should introduce a system of grants, which it could easily administer through the PAYE system, which would link aid to the number of workers still on the payroll. This relief could be restricted to a level of 20% of the payroll to avoid unproductive presenteeism, but would give businesses an incentive to keep workers doing productive work, rather than laying them off.

The Government is dealing with unprecedented problems and it has responded fairly well to the economic challenges so far. However, the system of support needs tweaking to avoid unnecessary loss of productive work.