Economists Yeoh Lam Keong, Manu Bhaskaran, Donald Low and Tan Kim Song set out key principles that should guide the state’s support for the private sector, the poor and the unemployed in what is turning out to be a cataclysmic disaster.
An economic crisis looms, with medium-term impacts on our well-being which could well rival the loss of human lives and health from COVID-19. Across the globe, economies are in free fall. Even in the unlikely event that the pandemic is contained by the middle of the year, global growth for 2020 will probably still be negative. Both the US Federal Reserve and the IMF now expect an even deeper US and global recession than following the global financial crisis.
Principles of fiscal support in a severe pandemic
In this context, only state support can avert the collapse of the private sector. But what principles should underpin this response?
First, fiscal policy-makers must view the pandemic as a cataclysmic natural disaster, similar to a massive earthquake or hurricane. At the same time, its economic reverberations will be chronic, lasting several months, rather than acute. Falls in business confidence will feed into increased layoffs alongside reduced investments and consumer spending, leading to further declines in confidence, amplifying the pandemic’s effects. This means the Singapore government’s long-standing concerns around moral hazard, or the state inadvertently propping up firms that are not viable in the long term, become less relevant. It is necessary to use our fiscal resources to mitigate the impacts of such a crisis, to maintain business and consumer confidence, national productive capacity, and individual livelihoods.
Second, in a severe natural disaster, the burden of adjustment should be shared between companies, landlords, the state and workers in a sustainable and equitable way. The cost-sharing ratio should reflect the resources of each of these stakeholders. In Singapore, these resources reside overwhelmingly with the state, in the form of our reserves. These are accumulated from years of fiscal surpluses that arise when revenues exceed public spending. Taxpayers – both corporates (including SMEs) and individuals – have contributed directly to these reserves as much as prudent public spending policies. This already suggests where the burden of costs should lie.
Third, the economic and financial damage are mostly due to the lockdowns and shutdowns necessary to protect public health. These costs should be regarded as spending on a public good, which means they should be largely state-financed. For Singapore, the COVID-19 crisis support costs are likely to be small relative to both the absolute size and the normal rate of growth of our reserves. The amount of reserves expended over this crisis would also likely be recovered in a few years, even if we were to significantly increase support from current levels.
Enhancement to current support measures
While we welcome the additional measures in the Resilience and Solidarity Budgets, especially the 75% payroll support for all companies in April and May, Singapore is moving into a more prolonged lockdown than originally envisaged. More unconventional fiscal measures are now necessary.
The latest measures mainly addressed the two-month lockdown period. We need to consider multi-month assistance for payroll. Even if the extended circuit breaker is lifted in June, uncertainty and pessimism about the future along with a depressed global economic climate mean that consumer and business confidence will take many months to return to anything near pre-crisis levels.
Small businesses are the vital Achilles heel of the economy in this downturn. Not since the Great Depression would so many be forced to shut so rapidly unless emergency support is given. Standard fiscal policies, or even modern emergency monetary policies, may not reach them effectively. These closures are likely to generate a spike in unemployment close to depression levels, while triggering defaults that would stress the banking system. Policy-makers should not underestimate the second and third order effects of a fall in consumer and business confidence.
Expanded SME support: payroll and rents
There is therefore an urgent need for extra support measures for SMEs at the operational level, focusing on payroll costs, rental costs, and credit provision.
We suggest 75% payroll support as long as the circuit breaker measures are in place, 50% payroll support for the first three months after, and 25% for the subsequent three months. This provides the respite needed for firms to find their feet.
Much stronger support is also needed for rental costs—a huge burden for many SMEs and local businesses. Postponing rental obligations for six months, only for firms that have no reserves, is insufficient to avert widespread closures.
Measures could include legislation to enable effective annulment of commercial rent, extended to all companies forced to stop business by the lockdown. This should be of two months’ duration at minimum, and longer if the lockdown compels future business cessation. It should also be obligatory to pass the existing property tax rebates to tenants through the annulment of one month’s rent.
In addition, for a few additional months, it may be necessary to reduce rentals, and enable their payment by deferred instalments over a period of three to five years. We should consider legislatively mandated “rent abatement” that permits tenants materially affected by COVID-19 to pay a reduced and fair proportion of rent during the temporary relief period.
The COVID-19 Bill currently contains a provision for the adjudication of applications by assessors, so there is already a mechanism to determine a “fair proportion of rent” under the circumstances. A similar clause was introduced into the standard lease form of the Auckland District Law Society (ADLS) after an earthquake rendered many business premises inaccessible. In its current form, the ADLS clause applies to natural events like earthquakes and epidemics, which are outside the control of tenants and significantly impact the utility of their premises.
Landlords can be compensated for compulsory rent annulments in part with tax credits. Compared to the larger institutional landlords and government-linked companies (GLCs), smaller independent and individual landlords should receive larger tax credits or interest relief from banks. This, again, should be state-coordinated and -enforced. GLCs that are sizeable institutional landlords via REITS must lead the way for other major private players like CDL and Far East to follow.
Many of these measures have counterparts in Germany and New Zealand, where rentals already comprise a much lower share of business costs.
Emergency credit for SMEs
Overall, SMEs employ 65% of the workforce and account for about 50% of the domestic economy. This sector is critical to domestic economic capacity and must be protected from a hollowing out relative to larger domestic and foreign firms. Many SMEs will go bust without quick financial support. Most vulnerable are micro enterprises of below $1 million turnover, which make up about 70% of the 220,000 SMEs in the economy.
In this regard, the gold standard is Switzerland, which recently unveiled a SFr.20 billion (US$20 billion) package of emergency loans to small businesses. In its first week, it disbursed over SFr.15 billion to 76,034 businesses. Later that week, the Swiss government announced that it would double the facility to SFr. 40 billion.
In Singapore, the current enhanced funding for our SMEs—many of which are facing around 50% cuts in credit lines from banks—seems inadequate. The effective interest rate should be brought down to around 2% per annum via government guarantees. Moreover, this funding is more easily accessible by bigger SMEs and needs to be complemented by further support targeting micro and smaller SMEs.
To this end, we suggest a quick and easily approved immediate line of government credit to all SMEs of up to $1 million (or a maximum of one year’s operational cost, whichever is lower), at zero interest rate. At the end of the year, when these companies file their taxes, losses up to a maximum of $100,000 can be offset against the loan.
The balance of the loan can then be amortized over the next seven to ten years. The government can guarantee 80% of the loan, which can be charged at 0.5-1% per annum. Banks can assume the risks of the last 20%, with charges at market competitive rates capped at 5% per annum. To avoid funding already-failing firms or recent start-ups, only SMEs which have been profitable in the two previous fiscal years should be eligible.
SMEs suffer another form of financial discrimination during crises: big companies, which have more leverage, can delay payments or change payment terms. The government should use its authority to say that it will not tolerate such practices, and act against offending firms.
We should also pass legislation providing that no SMEs can be evicted during this recession for late payment of rent, or made insolvent for late payment of loans, without adjudication and arbitration under the COVID-19 bill. This can help prevent unnecessary bankruptcies, while protecting the interests of landlords and the financial system. Otherwise, this crisis will cause far more unemployment than necessary, and Singapore’s SMEs could be severely hollowed out.
Support for low-income Singaporeans
Finally, better care must be taken of the poor in this crisis and beyond.
The $3,000 one-time support for all Workfare Income Supplements (WIS) recipients and the $800 a month for Singaporeans laid off in this crisis are commendable. But they are no substitute for a permanent additional cash payout. This could be $500-600 per month for all WIS and Silver Support Scheme (SSS) recipients. The WIS should also be extended to members of the gig economy. These expanded cash transfers are clearly superior to the utility or service and conservancy charge rebates that have been favoured by past administrations in addressing previous crises, since cash is fungible whereas rebates are not.
Finally, we need a properly designed unemployment insurance programme that will provide automatic support for unemployed residents during economic crises. While it is too late to introduce such a programme to deal with the current crisis, the current administration should use the current opportunity afforded to persuade citizens that such a scheme carries long-term benefits in terms of risk-sharing, solidarity, and macroeconomic stabilisation.
This crisis has revealed systemic inequalities in our society that will take many years, even decades, to address. But there is a great deal that Singapore’s policy-makers can do in the short-term to avert the collapse of the private sector. The survival of SMEs and support for low-income groups merit their immediate attention.
More about the authors
Yeoh Lam Keong, an independent economics consultant, is the former chief economist of GIC; Manu Bhaskaran is CEO of Centennial Asia Advisors; Donald Low is professor of practice in public policy at the Hong Kong University of Science and Technology; Tan Kim Song is an associate professor of practice in economics at the Singapore Management University.
For media: Are you interested in republishing this article? Please see our guidelines here.