Year in COVID-Economics

Rembrandt van Rijn: Moneychanger // Public domain

In March 2020, under the pressure of a growing pandemic, we voluntarily shut down the economy for the first time to protect the lives of fellow citizens.

Over the next twelve months, when the economy and the people have already been locked in a lockdown several times, we have managed to completely devastate the services segment, we have managed to devastate children in online education and, worst of all, we have not prevented a high number of deaths from COVID. The government has issued one chaotic measure after another, and to improve its media image at least a little, it has taken the public purse to a depth that will not be seen for generations to come.

State Redistribution and Million Covid Programs

For twelve months, the various ministries have been competing to see who would announce more COVID compensation programs. For example: COVID-Bus, COVID-Rent, COVID-Insulation, COVID-Spa, COVID-Accommodation, COVID-Culture, COVID-Sport, COVID-Gastro, COVID-Nursing and so on. For completeness, I counted fifty-three different compensation programs and measures for companies, tradesmen and employees.

Subsequently, not even their co-author, the Deputy Speaker of the Chamber of Deputies, Hamáček, the chairman of the ČSSD, on whose votes the ruling ANO party relies, was able to find his way through the multitude of measures, and his photograph appeared on the ČSSD’s Facebook page with the words: “There are about a million COVID programs. Nobody knows what they are anymore. Let’s simplify it! We know how.”

And that’s the problem. The multitude of COVID programs and state measures are not understood by the politicians who created and approved them. They are also not understood by the companies for which the aid is intended. Neither do the tradespeople and employees they are intended to help. These programs are complex, bureaucratically demanding and often help only certain segments of the economy.

For example, the COVID-Gastro compensation program compensates restaurants and cafés, but not suppliers. Thus, seafood suppliers, suppliers of professional kitchen equipment or companies servicing coffee machines are just as badly off as restaurants but do not qualify for support. Even suppliers of sports equipment are not covered by the COVID-Sport program, which compensates for closed sports venues, and so sellers of weights and fitness equipment have to find other ways to keep their business going.

The problem with the form of assistance in compensation programs is also their slowness. It can take up to six months before the money from the COVID-rental program reaches a hair salon that wants to keep its lucrative location and still hopes that maybe next month it will be able to open so it can pay rent. But by that point, the salon owner is already in debt because in addition to paying rent, he is also paying employees and waiting several months for their wages to be offset by the Antivirus program.

In an unexpected situation, such as a global pandemic that has caught all countries off guard, the speed of response is a matter of survival. Companies whose revenues have fallen to zero overnight are teetering on the brink of bankruptcy and cannot wait to see if a government official will approve their aid. Companies need quick, clear and effective solutions that help them immediately. And all businesses need these solutions, not just those in the segments chosen by politicians.

Bearish Service to Economy

Programs like Antivirus, which reimburses the wages of workers in closed businesses, only artificially maintain a workforce where it is not needed. For example, maids and housekeepers in closed hotels get paid for doing nothing. It’s a problem because a maid could go work in an online store’s call center. And a handyman could certainly find a job, too, perhaps in the construction industry, where there is now a shortage of foreign workers.

There are many companies that are growing in this pandemic, such as delivery companies, internet sales companies, pharmaceutical companies and so on. And these firms are currently having trouble recruiting employees precisely because they are still “employed” in companies that are de facto not in business.

Consequently, firms that could be growing are not growing because there is no one to employ. Hundreds of thousands of maids and maintenance workers are artificially kept in jobs where they actually do nothing. This is a waste of resources and a waste of taxpayers’ money, who pay their wages through the Antivirus program.

How to Help More Effectively

A far more effective, fairer and immediate help would be to stop paying levies on behalf of employees and paying taxes on corporate income for all firms whose revenues have fallen. The drop in income is easy to account for and there is no need for complicated paperwork.

Another quick and fair way to help is to refund tax for the last 3-5 years, depending on the level of accounting loss, to those companies that show a drop in income or no income at all. Companies would thus get back what they themselves put into the state coffers.

Young companies, which have only recently been established and have not yet managed to generate profits on which to pay taxes, could be given a period of grace not to pay tax on profits and a period, or tax holiday, to reduce the levy for employees. The length of the period would be determined by the accounting loss.

This period could also be used for companies that were entitled to a tax refund. Tax holidays are a strong incentive for entrepreneurs and self-employed workers to revive their businesses when the pandemic is over.

The government should also have reduced VAT to the lowest rates allowed by EU legislation, i.e. at the reduced rate of 5% and the standard rate of 15%. Lower VAT helps both consumers, who are left with more money in their pockets, and businesses. Thus, if the state were to collect only half of the VAT, the VAT tax collection would be reduced by around 200 billion, while the revised budget envisaged a deficit of CZK 500 billion.

State and Money

Wealth is created by entrepreneurs who employ people and by people who work. Public servants do not create wealth, so entrepreneurs, including small ones, need to be protected and supported.

It is necessary to realise that the state, and therefore the government, has no money of its own. The money that the state gives out is derived from taxes, both direct (road tax, solidarity tax, income tax, etc.) and indirect (excise duties). These taxes are paid by businesses and employees, and if the state does not have the money to redistribute and therefore save companies, which is the current situation, it has to borrow.

However, the loan is not free. It has to be repaid, and with interest. And it is these repayments that are the debt of future generations, because it is precisely because of the high debt repayments that there will be less money where it is needed in the future. For example, on education and teachers’ salaries, on health care and modern equipment, or on new motorways.

Even if the state decided not to write a million COVID programs and operate only with a reduction in levies, a tax refund or a time limit for non-payment of taxes, it would also have to borrow, mainly for operations, i.e. for pensions, for the salaries of doctors, firefighters, policemen and civil servants.

However, it would borrow an order of magnitude less, an estimated 25% of the current amount he has borrowed for compensation programs. Bureaucratic red tape would be reduced, companies would know exactly what they are entitled to and help would be immediate.

Those companies that would not be helped would free up labor for companies that instead need to grow, such as manufacturers of drapes and disinfectants. That is to say, allowing these companies to grow means that they will pay more taxes and employ more people. So the economy would be much better off in aggregate than it is now.

Written by:

Jana Pribylova – an analyst at Liberal Institute

Continue exploring:

Making It Work: Harmonizing Globalization and National Interest in Governance

Impact of COVID-19 Pandemic on Human Rights

Liberalni Institute