Protecting at-risk groups with timely fiscal policies

Apr 19th at 14:45
19-04-2020 14:45:29+07:00

Protecting at-risk groups with timely fiscal policies

The Vietnamese government has been urgently deploying sturdy solutions to assist enterprises and investors, and those hit by the coronavirus pandemic. Dr. Chi Tran, researcher/associate lecturer from the School of Economics and Finance at Queen Mary University of London, delves into the government’s policies in conditions of financial constraints to fight against the health crisis, with a reflection in the case of the United Kingdom.

Protecting at-risk groups with timely fiscal policies
Dr. Chi Tran, researcher/associate lecturer from the School of Economics and Finance at Queen Mary University of London

In the last few weeks, Vietnam has surprised the world by the fast and effective responses to the outbreak of coronavirus, especially in the conditions of limited financing, labour, and medical equipment facilities. Meanwhile, other less-welcomed strategies have been utilised in developed countries in Europe, notably the UK.

While the UK government was said to have initially underestimated the pandemic’s spread, it without hesitation launched costly programmes to support businesses, employees, and the self-employed to save the nation’s economy.

On the other hand, the Vietnamese economy is experiencing a period when the majority of enterprises are struggling without specific financial support programmes from the government, apart from Directive No.11/CT-TTg dated March 4 on urgent tasks and solutions to address the difficulties of production and business establishments, as well as to ensure social protection in order to cope with the pandemic.

Some vital questions are raised in this regard: should the Vietnamese government provide similar financial packages to save the economy? And if yes, who should be the beneficiary of this support, and how?

The UK government continuously announced stimulus packages on both the monetary and fiscal side to increase the economy’s resistance under global financial shocks caused by the coronavirus epidemic. On the monetary side, the Bank of England allowed nearly $390 billion in new loans and cut interest rate to 0.1 per cent to support business affected worst by the virus. On the fiscal side, a budget with more than $400 billion was announced to bail out the economy consisting of business tax cuts, sick pay for employees who need to self-isolate, cash grants, up to 80 per cent of workers’ salaries if companies do not lay them off, government benefits for self-employed and unemployed, support to renters and deferring for the next quarter of VAT.

The UK is, of course, not the only state spending huge amounts in efforts to save its economy, with the US and Germany among those leading the way in this regard.

Meanwhile, the Vietnamese government enacted a social distancing policy from April 1, with options to extend past two weeks. Like in many other countries, this policy would inevitably result in the frozen economy as most small- and medium-sized enterprises (SMEs) had to close their business premises temporarily or permanently.

Based on a survey from the Vietnam Chamber of Commerce and Industry on a sample of 500 companies, even before the social distancing policy, nearly 94 per cent of the sample confirmed the negative effect of the coronavirus pandemic. According to data recorded by Ho Chi Minh City Television, approximately 35,000 companies suspended their businesses in the first quarter of 2020.

With most businesses being shocked by the pandemic, something must be done to protect the economy. On March 4, Prime Minister Nguyen Xuan Phuc signed Directive 11 to implement actions against the ongoing outbreak of coronavirus, yet no businesses have received direct financial support from the government. The most obvious change as a result of the directive is that banks started to offer extension of repayment terms for borrowers affected by coronavirus, and reduced interest rates by 1-2 per cent. The other is the deferral of VAT, income tax, and land rental payment obligations for five months, as regulated by Decree No. 41/2020/ND-CP dated April 8 regarding extension of deadlines for payments of taxes and land rental fee. The decree is applicable to firms engaging in various business activities and have generated revenue from such activities in 2019 or 2020.

With a limited stimulus budget, the government should urgently implement more specific monetary and fiscal measures to save the economy, focusing on the endangered and vulnerable entities, particularly low-income individuals/families and SMEs.

Vietnam has 22.37 million households, 16 per cent of which are ranked as poor or near-to-poor standards. Most of these families have lost their primary incomes which are inherently low and unstable during the social distancing period. Thus direct and immediate cash grants for these people are vital not only to maintain their livings but also to control social security.

Similarly, SMEs are the first ones to be affected by the COVID-19 pandemic, as they have to maintain their business by limited financial resources.

According to data from the General Statistic Office of Vietnam in 2017, the total number of SMEs account for 98.1 per cent of 517,900 operating companies. The government is unable to provide a large enough package aid for all of them. Instead, policymakers should support the healthiest businesses to stabilise the economy.

Furthermore, the central bank should cut interest and allow banks to defer interest and debt payments for business. Besides this, banks have to use financial support from the government to repay customers’ savings on time.

Moreover, financial resources allow more business loans combined with low or zero interest rates that effectively support SMEs to cover expenses caused by the pandemic. Other fiscal policies which the government may consider are business tax reduction (in addition to deferral), reduction of property rental, and direct cash grants to employees who have lost their jobs, and to freelancers.

The success of the government’s financial support depends upon the vital factor of timeliness. The more delay, the more businesses will be forced to bankruptcy and other damages that may be irreparable.

VIR





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