Coronavirus support for industry reduces incentives to adapt: central bank


While government support measures were effective in supporting hard-hit industries in the first year of the coronavirus crisis, they also reduced the incentive for businesses to adapt to change, the Dutch central bank says in a new report.

‘That is why it is important to move away from generic support from now on,’ the bank said.

The support measures, the bank says, turned out to be very successful, keeping bankruptcy and unemployment rates low, and allowing the economy to rebound quickly during periods without social distancing measures.

But they also cost the government a lot of money. The wage cost subsidies and contributions towards fixed costs required a total of about €40 bn, while the tax office is still owed roughly €20 bn in deferred payments.

In addition, the back says, there is also the possibility that the support measures have allowed many underperforming businesses to stay afloat, whereas in an economy with ‘normal’ business dynamics, these businesses would have gone bankrupt.

Read the report summary, in English.

The measures come to an end on April 1, and that means companies will now need to adapt to the new situation, the bank says.

‘The support measures actually reduce the incentive for businesses to do so,’ the report concludes. ‘That is why, in an unfavourable scenario in which large parts of the economy are again forced to shut down for a long period of time, it is important to target the support more effectively.’

This, the bank says, can be done by focusing the support more on those sectors directly affected by compulsory business shutdowns. In addition, a turnover threshold may also increase the effectiveness of the measures.

The financial aid package also led the government’s macro-economic advisory unit CPB to warn last year that government support was keeping companies afloat which would have gone bust anyway.

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