Entitlement to government aid: is it right or not?

Winter is due, according to Dutch ministers. Companies are expected to borrow an amount of up to ten billion euros in the last quarter of 2020. Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, argues at Z360 and Het Financieele Dagblad that it is necessary to sustain all businesses at this stage of the global pandemic in order to prevent structural damage to the economy.

The amount of bankruptcies in the last few months have been historically low. In response to these statistics, there is an ongoing debate whether it is sensible to keep sustaining businesses which experience financial distress. One particular type of company, the so-called zombie-business, is at the centre of debate. Zombie businesses are companies that would not have been able to sustain themselves, in spite of the absence of a global pandemic. Whether we should restructure our economy, depends on the following question: are we able to restrain COVID-19 in the near future?

Significance of support

Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, believes we will be able to control the pandemic in the course of 2021. This will mean that we will be able to further open up the economy. In this case, it’s undesirable to have remodelled the economy. So, should we carry on with the current policy of sustaining all businesses? According to Jacobs, the answer is yes. The support granted to zombie firms is insignificant in comparison with the benefits we will be able to reap from sustaining all the other companies that are vital to the well-functioning of the economy. Unsustainable businesses will eventually go bankrupt, regardless of the current aid. Even more so, aid measures have become more efficient in the course of this year. Differentiation between sectors has become possible: this means that sectors in need of more help can be given more support.

Government action

Jacobs fears that we will face an enormous economic challenge if we are not generous enough during these deciding months. If the aid measures are inadequately distributed, businesses that would have been healthy otherwise, would fail to survive, resulting in severe damages to the long-term economy. In the current situation, Jacobs point out that the government has a strong position: it is able to borrow money at negative rates on the financial market. The government has deep pockets and will be able to sustain borrowing large sums of money. According to Jacobs, amongst others, the government should consider rising the level of debts in relation to GDP; in the current situation, the EU guideline is a maximum of 60% of an economy’s GDP. However, there is a large demand for low-risk investments which could justify a higher amount of debt. Immediately repaying the increased debt after the current crisis isn't necessary either, according to Jacobs. In the last years, government debt has been relatively low; the strict measures following the financial crisis of 2008 have inflicted substantial and unnecessary damage to the economy. Borrowing money is the preferred choice.

In conclusion, it is sensible to continue the current policy. Fiscal incentives will be of use when the economy opens up again. In the current situation, Jacobs argues that such measures are not optimal because of the fact that the multiplier is broken: consumption has slowed down, which results in a lower velocity.

More information

You can watch the full item of Z360, 28 October 2020, here. The article from Het Financieele Dagblad, 4 November 2020, can be downloaded above.

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