Annex D. Examples of government support measures
This annex section offers context related to policy measures that provide support to firms and workers in times of economic hardship; both for general recessions and more specifically to economic shocks such as the COVID-19 crisis. It complements the evidence presented in Chapter 2, providing more detail and presenting selected examples of interventions and supports. These include measures for workers, through employment resilience; firms, through liquidity support; and industry, in this example through support for the aviation sector (Box A D.2). Generally speaking, governments across the OECD have designed their strategy to address the economic consequences of COVID-19 around three key policy objectives: supporting firms and workers, stimulating the economy, and promoting structural change (Figure A D.1).
Governments across the OECD have followed what could be termed a “3 S” strategy to tackle the economic consequences of the COVID-19 crisis:
Shield firms in the short term to minimise long-term damage, in particular by preventing the “death by accident“ of otherwise healthy firms.
Shift the industrial structure to address current needs in terms of essential goods and services, adapt to the current situation and increase resilience to future crises.
Stimulate aggregate demand through expansionary fiscal and monetary policy, ensuring effective timing and leveraging synergies with the “shield” and “shift” efforts.
Different types of policies are needed at each phase of the crisis:
The short run (“containment”), as non-essential activities are suspended.
The medium run (“co-existing with COVID”), as some businesses remain subject to COVID-19-related restrictions and demand is weak.
The long run (“vaccine/treatment”), when interventions should focus on increasing resilience.
Figure A D.1 sketches the overall policy response and provides examples for each type of intervention.
As discussed in Chapter 2, labour market institutions contribute to economic resilience by helping employment rebound in the wake of economic downturns, like the one due to COVID-19 and the shutdown of non-essential activities. Moreover, they protect workers’ incomes and thus are a key automatic stabiliser to dampen output fluctuation and repercussions on the financial system through loan defaults.
Two main types of policies contribute to such resilience: policies aimed at job retention (temporary work schemes, temporary layoff schemes and administrative measures to limit dismissals) and unemployment insurance systems. Their relative efficiency depended on the length and persistence of the COVID-19 shock, as well as the dynamics of recovery.
Transitory and exogenous shocks typically require limited reallocation of resources on economic grounds. Many of the activities that were temporarily disrupted due to COVID-19 – especially during the initial shutdown period – are likely to bounce back towards pre-crisis conditions (e.g. in professional services). In this case, job retention policies that preserve efficient firm-worker matches are important for ensuring that businesses can resume activity quickly.
Other types of shocks require a sizeable reallocation of resources on efficiency grounds because they induce persistent changes in preferences and relative prices. With COVID-19, some existing jobs may become unviable or obsolete, either through tipping some firms which were only marginally profitable prior to the crisis into loss, or because consumption patterns will be permanently affected by new norms, such as those regarding health (e.g. travel or recreational services). In this case, relying on the unemployment insurance system can be more efficient as it allows for the necessary reallocation of resources.
Table A D.1 categorises OECD countries into those with extensive job retention schemes (“retention-based countries”) and those that continue to rely mostly on unemployment insurance (“unemployment insurance-based countries”). Retention-based countries have either expanded existing job retention schemes or introduced large schemes during the crisis, with take-up suggesting that a significant share of businesses and workers are participating in them. Unemployment insurance-based countries do not have a job retention scheme in place, or take-up of existing schemes has been limited to a small fraction of businesses and workers.1
Protecting healthy firms from the immediate impact of mitigation and containment measures not only aides in short-term resilience, but also helps minimise long-term damage and supports a speedy recovery. As stressed throughout this report, liquidity assistance is key in preventing “death by accident” of otherwise economically viable firms.
Tax systems play a key role in quickly delivering financial support to businesses.2 Short-term tax measures aim at cushioning the immediate impact of the crisis on firms and maintaining economic capacity. Table A D.2 lists the main tax measures that OECD countries introduced to reduce the adverse impacts of the containment response by supporting business cash flow. Measures are similar across countries, with a strong focus on increased flexibility for taxpayers. As discussed in Chapter 2, the most common measures are tax payment deferrals (mainly for corporate income tax, value added tax and social security contributions), additional time to file tax returns, more lenient tax debt repayment and enhanced tax refunds (OECD, 2020[3]). A few countries also introduced measures that reduce firms’ tax burden during the health crisis, with the most common type of waiver related to social security contributions.
Beyond horizontal support measures affecting firms across the board, governments also enacted support targeted at specific industries because of their extreme vulnerability to the consequences of the COVID-19 shock and/or their employment weight (e.g. the aviation industry – see Box A D.2).
The dramatic drop in demand for passenger air transport (and freight, to a lesser extent) due to the COVID-19 pandemic and containment measures is a threat to the viability of many firms in the aviation industry. These firms are in the air transport sector, but also in support activities to air transportation (including the operation of airports), aircraft manufacturing, rental and leasing services, and refined petroleum manufacturing. The combination of negative demand and supply shocks and the uncertainty around the medium-run outlook creates an uncertain perspective for airline companies. Through inter-industry linkages, this uncertainty affects the whole aviation industry, with many jobs at stake (for more on inter-industry linkages, see Chapter 6).
The aviation industry has often been subject to government intervention, mostly in support of aircraft manufacturers with the rationale of learning-by-doing and significant economies of scale. Public policies have also aimed at coordinating a wide array of suppliers and different sources of knowledge and ensuring aircraft safety. More recently, aircraft manufacturers have been the target of green industrial policies, seeking to accelerate the shift towards low-carbon aircraft. Beyond supporting aircraft manufacturers, governments have also intervened to preserve employment in large air transport companies.
Note: Proposed or confirmed, monetarily quantified relief measures for airlines provided by governments or government-backed entities across 57 countries as of August 20, 2020 in USD billion. Measures include: government-backed commercial loans and government guarantees; recapitalisation through state equity; flight subsidies, nationalisation; deferral and/or waiver of taxes and charges; grants; and private equity.
Source: Adapted from Abate, Christidis and Puwanto (2020[5]).
When it comes to the response to the COVID-19 crisis, many sector- or firm-specific measures have targeted air transport. By August 2020, governments had provided about USD 160 billion of support to airlines (Box A D.2). Almost two thirds of that support consisted of direct aid (e.g. subsidies, loans, equity, cash injection), while a quarter took the form of wage subsidies. Interventions have generally taken three forms:
untargeted support schemes, designed to provide liquidity to firms irrespective of their activity, including the extension of existing job-retention schemes or the introduction of new ones
sectoral schemes (e.g. airlines operating in Australia or the whole aviation industry in France), including those supporting airline workers (e.g. the Payroll Support Program in the United States)
firm-specific support measures, including partial or total nationalisation, implemented by some countries because of the presence of large companies in the air transport sector (e.g. Alitalia, Lufthansa).
Governments can promote a sustainable trajectory for the aviation industry by prioritising sector-wide measures and competition, in particular to:
strike the balance between the need for support and the risk of distorting competition
encourage investments in the green transition and thereby increase long-term resilience
address sustainability along the whole aviation value chain.
Source: OECD (2020[6])."COVID-19 and the aviation industry: Impact and policy responses", https://doi.org/10.1787/26d521c1-en.
References
[5] Abate, M., P. Christidis and A. Puwanto (2020), “Government support to airlines in the aftermath of the COVID-19 pandemic”, Journal of Air Transport Management, Vol. 89, https://doi.org/10.1016/j.jairtraman.2020.101931.
[6] OECD (2020), COVID-19 and the retail sector: impact and policy responses, OECD Publishing, Paris, https://dx.doi.org/10.1787/371d7599-en.
[1] OECD (2020), “Issue Note 5: Flattening the unemployment curve? Policies to support workers’ income and promote a speedy labour market recovery”, OECD Publishing, Paris, https://dx.doi.org/10.1787/1a9ce64a-en.
[2] OECD (2020), OECD Economic Outlook, Volume 2020 Issue 1, OECD Publishing, Paris, https://doi.org/10.1787/0d1d1e2e-en.
[4] OECD (2020), OECD Tax Policy Responses to COVID-19 (database), https://www.oecd.org/tax/tax-policy/covid-19-tax-policy-and-other-measures.xlsm (accessed on 20 August 2020).
[3] OECD (2020), Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience, OECD Publishing, Paris, https://dx.doi.org/10.1787/60f640a8-en.
Notes
← 1. The categorisation relies on expert opinion of the OECD country desks and on the OECD COVID-19 Policy Tracker to determine whether the system is mostly job retention-based or unemployment insurance-based. In practice, many countries have hybrid systems that combine short-time work schemes and unemployment benefits. Some countries also introduced wage subsidies, which support both worked and non-worked hours. Details on the schemes can be found in Annex Table 2B1 in the June 2020 issue of the OECD Economic Outlook (OECD, 2020[2]).
← 2. Governments also made use of non-tax measures (e.g. loan guarantee schemes or interest-free loans and cash grants). Moreover, job retention schemes act as a liquidity support measure for firms since employment is not fully adjustable in the short term.