“Short-time regime for capital” as a third pillar

What Switzerland has achieved in the last few weeks is remarkable. With the expansion of criteria for short-time work and the containing of liquidity squeezes, two main pillars have been erected for employees and companies.

The first pillar maintains employment. Through the expansion of short-time, companies can reduce their business to the currently necessary level without losing human capital. Short-time work compensation generates income security for employees and prevents structural losses in the economy.

The second pillar in the set of measures promulgated by the federal government to cushion the economic impact of the pandemic further reduces liquidity squeezes in companies. The state guarantees provided by this second pillar open simple,direct access to bank credits and bridge the cessation of revenues, at least in the short term. These credits, however, have to be repaid.

A third supporting pillar to counter cascading effects, and for the restart

In order to not only bridge the immediate crisis, but also to remain viable after the crisis, we need – besides appropriate medical and economic exit strategies – a third pillar: a “short-time regime for capital”, as we have already envisioned in our proposal for a 100-billion-franc safety net.

If companies alone have to carry so-called capital costs – like rents, leases, and interest payments on loans – many of them, especially small and medium-sized enterprises[1], will cease operating, or else will not be capable of investing sufficiently after the crisis because to their high debt burden. The longer the current social and economic restrictions have to be maintained, the more this risk increases. This could slow down the dynamic of the economy for an extended period. In addition, an increase in company closures could have cascading effects. We must prevent this with the third pillar of support, a “short-time regime for capital”.

We need measures to absorb capital costs. This is where companies themselves are called on. Through the mobilisation of reserves, restraint in distributing profits, the extension of deadlines and the offering of discounts during interruptions in production, a portion of these costs should be borne both by the companies themselves and by investors and lenders of capital. We can rely on this happening to a certain extent. Yet even if companies and investors can and must accomplish a substantial part themselves, additional government support will be appropriate during this forced shutdown of production.

Implementation through already existing channels

Just like labour costs, capital costs should also be compensated to a certain extent during a production shutdown, on the basis of a request to the federal government. The channels that are already being used for short-time compensation and for liquidity assistance would work for the practical implementation of such a policy. The “short-time regime for capital” could be based on rental or leasing contracts or on interest payments on loans during the period before the outbreak of the corona crisis. Such financial support could be applied for the duration of a production slump or stoppage.

Another pragmatic but less direct form of support could consist of the partial reimbursement of the value added tax paid in the previous year. Applications could be made immediately and the aid payments would function as a sort of “advance until further notice”, to be reckoned up once the corona crisis is over. Depending on one’s commercial success during the crisis, the money would have to be repaid according to certain criteria: Companies that suffered little or not at all would have to repay the entire sum, while the hardest struck would not have to repay anything. This solution would also enable the self-employed with no revenue to maintain a small base income. For the determination of the amount to be repaid, a comparison between the value added tax of 2020 and 2019 could be made. For companies who pay little or no value added tax – such as export-oriented firms – an analogous procedure could be followed.

A more just distribution of the burden within society and the economy

Research has shown that companies with higher debt tend to reduce their investment more strongly after a crisis.[2] We should try to prevent this. The third pillar that we propose, the “short-time regime for capital”, reduces the danger of insolvency and ensures that the economy can take off immediately after the pandemic, and firms can invest again. In addition, the third pillar would see to a more just distribution within society and the economy of the burdens generated by the crisis. Through no fault of their own, many companies face threats to their existence. They are accepting a break in production in order to stem the spread of the pandemic, and for this they are entitled to the support of all parts of society and the economy.

As soon as the economy has recovered, one could also retroactively implement a sharing of the burden by temporarily raising the corporate income tax with a kind of “corona-surcharge”. After the pandemic all companies should contribute to the costs of overcoming the crisis, based on the scope of their economic success. A temporary corona-surcharge on their profits would be a fair instrument to use for this purpose.

Can Switzerland afford this three-pillar programme? Yes, it can, thanks to the debt limit and Switzerland’s overall fiscal policy: Only very few countries have a lower level of government debt. If Switzerland reaches it pre-corona level of GDP again, a crisis intervention even in the order of 100 billion francs is manageable. As the Swiss proverb says: We saved back then, now we have something in our time of need.

[1] Should large businesses experience perilous imbalances during the Corona crisis, then a temporary, silent partnership by the state should be considered instead.

[2] For example Kalemli-Ozcan et al. (2020) demonstrate that this so-called “leverage channel” of companies can explain 40 percent of the cumulative retreat in total investment over the four years after the financial crisis. Gebauer et al. (2017) show that even moderate debt can negatively affect investment by smaller companies.

Literature

Kalemli-Ozcan, Sebnem, Luc Laeven, David Moreno (2020), Debt overhang, rollover risk, and corporate investment: Evidence from the European crisis, NBER Working Paper 24555, first published April 2018, Revised February 2020.

Gebauer, Stefan, Ralph Setzer, Andreas Westphal (2017), Corporate debt and investment: A firm level analysis for stressed Euro area countries, ECB Working Paper 2101, September 2017.