Government support should not be used as a means to an end

MKB Nederland
Erasmus School of Economics

Politicians are more and more calling for conditions, such as sustainability, to be attached to the emergency aid that is provided to companies. The argument behind it is that taxpayers do not support the business sector for nothing and companies should provide something in return. Moreover, there is no better time than during a crisis to make major changes. Bas Jacobs, Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics, has sympathy for what politicians want to achieve, but wonders whether the emergency support should be used as a means to enforce all this.

Safeguarding jobs

The aid currently given to companies is not intended to help a company grow, but to safeguard employment. There are potentially 1.8 million hidden unemployed people, workers whose jobs are at risk as a result of the corona crisis. Supporting business is the means, not the goal. The corona crisis has brought a fifth of the economy to a standstill and this year a contraction of at least 20% is expected. Many companies can only keep on paying salaries thanks to the support they receive, in order to maintain the jobs of the people who work there. Because of the crisis companies have no profit, hardly any turnover and the solvency is low, because of the deduction on equity. There is no money to invest in the wishes of politicians.

Counterproductive effect

Some critics argue that only companies that are virtuous deserve support. Bas Jacobs does not support this statement. He argues that, in such cases, any company that in the eyes of some is not serving the public interest - and who decides that? - is going to go under because it's not sustainable enough or doesn't pay enough tax. Jacobs explains that when companies cease to exist, you do not just get rid of the shareholders, you rid of all the jobs in those companies. These bankrupt companies and their unemployed workers no longer pay tax, for example to pay welfare benefits or healthcare. It is an extremely inefficient way to achieve political goals. These kinds of targets must be achieved with as little damage as possible to the economy, employment and the treasury, Jacobs concludes.

Proposed terms and conditions

Many of the terms and conditions attached to the second support package are business-economic related. Requirements such as the non-payment of dividends and bonuses for top management, or the purchase of own shares, must ensure that the public money does not flow directly back into the company. Requirements such as sustainability, however, still seem difficult to achieve for the time being. As Klaas Dijkhoff said during the parliamentary debate on conditions: 'You shouldn't ask a transport company to stop emitting CO2 if it receives support and a pub to only serve non-alcoholic drinks. Then you're mixing things you can wish for with the purpose of the support package'.

If the government invests a lot of money in a large company to prevent bankruptcy, terms and conditions are acceptable as long as they are properly set. In the case of a KLM-like company, there is something to be said for allowing the state to become a larger shareholder instead of just providing a loan, says Bas Jacobs. In that case you do not only have a downside risk, that the money is gone if bankruptcy turns out to be inevitable, but also an upside risk, because the state then shares in future growth. In better times, this also benefits the taxpayer, who is a shareholder and benefits from profit made. According to Jacobs, this is better for the consumers' confidence in business. Nevertheless, he argues that emergency measures for companies should be aimed at making the measures themselves as good and effective as possible. The political momentum could for instance be better used to introduce a global tax on CO2 and kerosene, instead of imposing environmental requirements on crisis measures, Jacobs says.

Professor
More information

Read the entire article from MKB Nederland here, 14 May 2020 (in Dutch).