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A plan to preserve jobs and businesses

/ 05:05 AM April 12, 2020

To enforce the enhanced community quarantine, the government forced the closure of many micro-, small-, and medium-scale enterprises (MSMEs). This is necessary to safeguard public health. But now the livelihoods of millions of workers in the Philippines are at risk, and so is the economic future of the Philippines.

As a sector, MSMEs employ 70 percent of the working population in the country, contributing to 30 percent of our economy’s output. In Metro Manila alone, there are a quarter of a million MSMEs, accounting for 3 million jobs.

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Many of these businesses are now unable to meet payroll and nonpayroll obligations. Yet there is little immediate relief available to them to bridge the liquidity gap. The enhanced community quarantine and the Luzon lockdown have already seen businesses liquidate or go bankrupt. Without policies to prevent this, millions of jobs will be destroyed, and with those, much of the productive capacity of the economy.

Together with some faculty members of the UP School of Economics, I put forward a comprehensive plan to manage the crisis (“A Philippine Social Protection and Economic Recovery Plan”). Many of our suggestions have since been incorporated into the Bayanihan to Heal as One Act, which emphasized the social protection of the most vulnerable households. This is a step in the right direction, but more must be done to preserve businesses and jobs.

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To reduce expenses when you get sick, you pay a regular premium to a health insurance company. The COVID-19 pandemic is a “health shock” of unprecedented scale borne by businesses. Only the government is large enough to absorb it. I propose a government-backed business insurance—an idea that Steven Hamilton (The George Washington University) and Stan Veuger (American Enterprise Institute) originated. Think of the taxes and fees businesses have paid as the insurance premium.

The government must cover revenue losses of MSMEs directly affected by the lockdown. Fiscal support packages from the United Kingdom, Denmark, and Australia, for example, will partially cover wages. But businesses have nonwage obligations, too, such as rent. For some, even a full payroll subsidy from the government will be insufficient to keep them afloat.

Covering revenue losses of businesses would allow many of them to meet their financial obligations. The loan facility can be limited to businesses whose revenue has fallen over a particular threshold (say, 30 percent) based on previous tax returns. New businesses can demonstrate their losses based on accounting records. The threshold can be varied based on turnover.

The financial support to businesses can take the form of bank loans. Businesses can approach a bank to prove their revenue losses. Banks should provide the loan to cover the loss. The Bangko Sentral ng Pilipinas can facilitate this by backing the loan and taking on the default risk. Private banks, in this sense, merely serve as conduits of government-backed loans.

The loans ought to be contingent on maintaining the employment relationship. Tying future tax credits to the loan can ensure this. If there is no reduction in full-time equivalent (FTE) payroll, then the tax credit shall be equivalent to the principal plus interest. Any reduction in FTE payroll should incur a proportional reduction in the tax credit.

Provisions can be included to reduce perverse incentives to inflate income by reducing other costs. The Bureau of Internal Revenue can set up an ad hoc team to ensure compliance.

The government response to the crisis must be as wide-ranging as the scale of the crisis demands. So far, the public discourse has emphasized the most basic social protection for vulnerable households. To be sure, this is crucial. There won’t be much of an economy to save if too many lives are lost.

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But there is no excuse for a blind spot in saving livelihoods which form the very fabric of our economy. If the government fails to provide adequate support for businesses, we will find ourselves on the back foot when the time comes to reinvigorate the economy.

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Alfredo Paloyo is a senior lecturer in economics at the University of Wollongong, Australia. Twitter: @AlfredoPaloyo.

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TAGS: Alfredo Paloyo, Commentary, coronavirus pandemic, COVID-19, Luzon quarantine
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