What is the term furlough? This is a term, few of us were aware of until the Coronavirus lockdown, but it has recently become a lifeline for many people and businesses. The logic of furlough - keeping workers attached to their employer through this crisis so the business can restart operations rapidly when it's over - carries strong political support.

The scheme is preferable to mass redundancies now and attempted re-employment later. The argument goes that keeping workers linked to their employers by way of a wage subsidy gives a measure of continuity. Otherwise, if the company sacks its workers, it often loses the skills and knowledge of that particular worker, who is matched to that specific firm.

Politicians will argue that lay-offs could slow down any expected and potential economic recovery, since rehiring and training workers in the private sector may be substantially costly. This is particularly true for workers who have acquired job specific skills. In their case, it may be beneficial for firms not to let them go but retain them on their books and with the help from Malta Enterprise pay them a reduced wage.

In theory, this looks logical but in practice firms, which are under lockdown, face other problems of cash flows resulting from ongoing weak demand for their products or services. Obviously, any cash reserves in companies will quickly dry up if when returning to normality they discover that demand for their products or services has diminished.

Banks are not likely to fund such companies seeing them as bad risks unless backed by a no-frills government scheme or a central bank makes good collateral for such risky lending. Another major problem for local companies in wholesale, retail and services for the domestic market is that the feel-good factor among consumers is low.

Obviously in Malta, even though government started last month issuing free cash vouchers to all residents, in an altruistic effort to boost demand, so far it failed as the spirit is willing but the body is weak. Furloughed workers are by their nature risk averse and trim down consumption patterns to bare essentials. This creates a domino effort on domestic demand and slows down commerce. They don't know when they will be able to restart operations as the supplement scheme ends in September.

In the case of hotel, food services and kindred activities they are rather disappointed at the low turnout of visiting tourists when the ports were re-opened on 15 July. They expected 10 times more in arrivals and are doubtful if the marketing drive by the Malta Tourism Authority to attract mass foreign youth parties will do the trick. What is helpful is the decision by Malta Enterprise that is adjusting the wage supplement parameters in an effort to continue supporting the hardest hit sectors and provide a tapering of aid to all other activities during this regeneration period.

Simply put, selected businesses that are adversely impacted by the economic repercussions of the COVID-19 pandemic (or had to suspend operations ordered by the Superintendent of Public Health temporarily) are entitled to up to a wage of €800 for full-time employees and €500 for part-time employees. The basic gross of €800 per month for a full-time employee can be topped up by €400 by the employers to fight redundancies and furloughs. Observers point to a disruption of major supply chains and weakening of aggregate demand through individuals' lower consumption patterns.

On the bright side, the good news is that the unemployed force did not skyrocket after the three months of the lockdown. Party apologists wax lyrical that the Malta Enterprise scheme provides a welcome boost to bolster cash flows and, therefore, to ratchet aggregate demand, thus helping to sustain national income and employment levels.

What happens when the tap is turned off at the end of September? Unfortunately, with the dismal low rate of tourist arrivals there is reduced scope to keep hotels and restaurants and most Valletta souvenir shops open. Some major hotels are considering closing for the rest of the season and reopen in Easter next year, when they hope the golden era returns.

Business lobby groups have raised the alarm over a potential wave of redundancies when the scheme ends. The dilemma for many businesses is that they do not know what will be the state of demand for their goods and services in the coming winter months. Many suspect that it will not be as strong as it was prior to the lockdown.

If that is the case, they may feel the need to reduce their workforce especially if, God forbids, there will be another surge of COVID-19 infections that will trigger a second lockdown. This is happening in Israel as they have been somewhat careless on the handling of the pandemic and have locked down for too short a period. Now, they are faced with shortages of hospital beds and ventilators due to the galloping number of victims.

Back to Malta - it is known that in the early 1980s we suffered chronic high unemployment. This had applied the brakes on the economy. Upon reflection, it is not a moment too soon that the Commission last week agreed to a massive €750bn recovery plan. Such a positive agreement is expected to result in productive capital being regenerated, while the long-term productivity of the economy is pushed upwards.

On the dark side they need to be glanced within the context of tax policies. In other words, Malta Enterprise's cost to support such a furlough scheme, in combination with the deferring of the majority of income tax payments and the declared tax holidays for businesses in various sectors of the economy, is expected to incur a substantial increase in budget deficits, with further repercussions for public debt levels.

Such debts clamour for additional tax burdens in years to come. Critics question whether the expensive furlough scheme was money wasted should there be a second severe wave of infections (like what is happening in China, Spain and Australia). Have we kept zombie companies, such as hotels, resellers, self-employed, etc. alive and paying people whose current positions may not be needed again? As the scheme tapers off before ending in September, redundancy is back on the cards.

No marketing effort should therefore be spared by the MTA so that recovery is hastened. It goes without saying that the millions paid to furloughed workers and the issue of free cash vouchers by the state was a palliative and not a permanent cure.

Such money went to temporarily suppress the queue of the jobless but did not solve the lack of domestic demand. The lyric of the furlough workers wafts gently in the waning rays of the winter sun.

 

 

The writer is a partner in PKF Malta - an audit and business advisory firm