Budget moves 'prioritise viable firms for a reason'

Singapore

SOME measures in the S$4 billion Covid-19 support package have been said to help firms that are doing well, while offering little comfort to struggling ones. Yet - setting aside the fact that there are also moves which benefit all firms - there might be good reason to prioritise viable firms over providing artificial life support.

The main measures in question are the 25 per cent corporate income tax rebate, and enhancements to the Wage Credit Scheme, which co-funds pay rises. These are "targeted measures to lighten the cash flow burden of companies that were profitable in financial year 2019 or employers with wage increases for their employees in 2019 or 2020 respectively", as Ernst & Young tax services partner Chai Wai Fook put it.

They will thus not help firms that are in a loss-making position, or those not looking at raising wages, said KPMG in Singapore deputy head of tax Ajay Kumar Sanganeria. "These enterprises would be more focused on minimising losses and might not tap these measures."

Said Withers KhattarWong LLP partner Amarjit Kaur: "If they are facing financial difficulties and a cash flow crunch, it is unlikely that they will commit to the wage increment, even with the co-funding support from the government." The Wage Credit Scheme change aims more "to shore up viable firms" that have been hit by the unexpected outbreak, she added.

First, it is worth acknowledging that the Budget includes other forms of help. Even struggling firms can gain from initiatives such as the S$1.3 billion Jobs Support Scheme, with 8 per cent wage offsets for local employees for the last three months of 2019.

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This "puts money directly back into the businesses" during this challenging time, said Deloitte Singapore and South-east Asia regional managing partner for tax and legal Low Hwee Chua. Enhanced tax measures, such as carry-back relief for three preceding years of assessment instead of one, will also aid those with cash flow problems or losses, he added.

But secondly, and perhaps more importantly, there might be good reasons for measures to be targeted.

One is that such measures may not be about "rewarding viable companies" but achieving certain aims, said DBS Bank senior economist Irvin Seah. The Wage Credit Scheme is about encouraging firms to give pay rises despite current challenges.

Another is that resources are arguably best spent on firms that have potential and aim to transform, rather than propping up those that were already struggling, crisis or not.

Tellingly, Deputy Prime Minister and Finance Minister Heng Swee Keat said that with the enhanced working capital loan, he expects financial institutions to do their part to support "viable SMEs". Just as banks assess borrowers for viability, it makes sense for at least some government support to be similarly discerning.

And even as the focus is necessarily on helping workers keep their jobs, it could benefit Singapore more in the long term if - amid the continued labour shortage - the closure of some less productive firms allows labour to flow towards more productive firms and industries instead.

Importantly, this does not mean a widespread abandonment of firms that might be faltering now. Said ESSEC Business School economics professor Jamus Lim: "I understand the sentiment behind wanting to avoid the situation where the government ends up supporting otherwise failing firms. But such 'creative destruction' of firms is probably best reserved for after the worst of a slowdown is well past, in order to avoid exacerbating what would already be an unwelcome drop in aggregate demand."

The idea is not to weed out the weak per se, but to help firms weather the storm - as long as they were "seaworthy" in the first place.