Direct subsidies, good anti-epidemic prescription for micro and small enterprises

An employee of an engine manufacturer works on a production line in Tangshan, Hebei province, in September. [Photo provided to China Daily]

To contain the spread of the highly infectious Omicron variant of the novel coronavirus, a growing number of Chinese cities have taken strict prevention and control measures, including implementing phased lockdowns. This has compounded the problems of already struggling micro, small and medium enterprises.

According to the quarterly online micro and small enterprise survey jointly conducted by Peking University and the Ant Group Research Institute, the percentage of micro and small enterprises (MSEs) with sub-par performance per compared to the previous quarter has increased and their cash flow has decreased over the last three quarters.

The government has launched a series of measures to help MSEs in 2020 after the outbreak of the COVID-19 pandemic, most of them being on the supply side, such as providing loans, exemption or the reduction of taxes, the deferral of employee social security contributions and the reduction. to rent.

Although tax reduction was the most inclusive policy support, it could not help many MSEs. Since many MSEs pay little or no taxes, or hire full-time employees, supportive tax and social security policies are of little help to them. As a result, many MSEs are still struggling, awaiting more targeted policy support to weather the headwinds.

Moreover, since most MSEs do not have collateral and ask for small loans, it does not make economic sense for banks to give them loans. Therefore, the smaller the business of an MSE, the less financial support it receives from government policies. This means that the potential for helping MSEs through supply-side interventions is limited.

Given the strict prevention and control measures implemented by local authorities, the government could consider providing more MSEs with direct demand-side support. Amid the shutdowns, demand for a host of goods and services is shrinking, posing the biggest challenge for MSEs, especially those in the consumer services sector, according to the Micro and Small Online Survey enterprises and enterprise survey for innovation and entrepreneurship in China. .

In addition to providing direct support to MSEs, such as waiving social security contributions for employees and reducing taxes, the government should consider providing income support to residents, including MSE owners, in areas where localized confinements are implemented. Indeed, income support will not only help prevent the vulnerable population from falling back into poverty, but also create pent-up demand for MSE products and services once the virus is under control.

More importantly, the income support policy will be more inclusive than supply-side interventions, as it will allow residents of affected areas to spend the money on goods and services. This will in turn benefit a large number of MSEs, especially those in the consumer services sector.

Some experts say such income support could increase the government’s tax burden, but the claims seem exaggerated.

First, localized closures are temporary and will not cause lasting damage to local economies. If the income support program can help maintain consumer demand and the production or service capacity of MSEs is not affected, life will quickly return to normal once the Omicron variant is contained. But without timely and appropriate government intervention, more and more MSEs could go bankrupt, which would increase the unemployment rate, reduce government revenues and force the authorities to spend more on long-term social protection.

Second, by specifying an exit strategy, the program can be phased out once prevention and control measures have been relaxed or withdrawn. This means that the budget cost can be capped.

And third, international experience shows that the risks associated with income support programs are manageable. Many countries have implemented income support programs since the outbreak of the pandemic and they have had rather limited negative effects on the economy. The most notable negative effect could be inflationary pressure resulting from a combination of rising demand and disruption of global supply chains. But since China has one of the most developed domestic supply chains in the world, inflationary pressure is expected to be more subdued in the country compared to other economies.

The author is a full professor of economics at Guanghua School of Management, Peking University. He leads the quarterly online Micro and Small Enterprise Survey and China Innovation and Entrepreneurship Enterprise Survey.

Opinions do not necessarily reflect those of China Daily.

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