Health crisis: what support measures for businesses and how effective are they? (Note)

Summary:

• The COVID-19 health crisis has had a negative impact on businesses, whose activity and margins have tended to decline and whose prospects have deteriorated at the peak of the health crisis.

• In response to their deteriorating situation, the public authorities put in place support measures, foremost among which were: partial activity, the solidarity fund, state-guaranteed loans, and the deferral of social security contributions.
• The public authorities also set up a committee to monitor and evaluate their implementation, which has already compiled statistics on companies’ use of these policies.

• While these measures have proven effective during the crisis, their widespread and prolonged use beyond the crisis could have adverse effects.

Usefulness of the article: The Covid-19 health crisis has had a negative impact on businesses, whose prospects have deteriorated. This article details the financial support measures implemented by the public authorities for businesses facing this crisis, characterizes the use of these policies by these businesses, and presents the political and academic debates surrounding these measures.

« Everything will be done to protect our employees and our businesses. Whatever the cost. » Thisstatement, made by French President Emmanuel Macron in March 2020, has resulted, among other things, in the implementation of measures to provide financial support to businesses facing the Covid-19 health crisis.

These measures mainly focused on reforming the partial activity scheme, creating a solidarity fund and state-guaranteed loans, and deferring social security contributions. While their implementation proved essential to preserving business activity and jobs in response to the crisis, their extension beyond this period raises questions. Indeed, with economic recovery on the horizon in 2021, measures to phase out these schemes appear necessary in order to support economic recovery while limiting the adverse effects associated with their use. First, an overview of the companies facing the Covid-19 health crisis is provided, followed by a presentation of the support measures. Second, the extent to which these measures have been used is documented, raising the question of how to evaluate their effectiveness.

1. Overview of businesses facing the Covid-19 health crisis

The Covid-19 health crisis has had repercussions on the entire economy. According to the nation’s accounts for 2020, French GDP recorded its biggest decline since World War II, contracting by 7.9% in 2020. Activity contracted slightly in the first quarter of 2021 (-0.1% quarter-on-quarter) due to the tightening of health restrictions from January to April 2021. With the gradual lifting of these restrictions and the rollout of vaccinations, economic activity is expected to recover significantly in the second quarter of 2021 and for the rest of the year, as shown by the Banque de France’s macroeconomic projections for June 2021 (+5.75% in 2021 and +4.0% in 2022).

This downturn in economic activity has had different consequences for different companies. Although their loss of revenue is estimated at an average of 27% between March and May 2020 and more than 15% between March and December 2020according to the Banque de France, forcing them to reduce their expenses and borrow to meet their deadlines, the difficulties they face vary greatly.

2. Financial support measures for businesses

In order to preserve the national productive apparatus with a view to preparing for the recovery and limiting the social consequences of the economic shock, a series of measures was announced by President Emmanuel Macron, transcribed in Law No. 2020-290 of March 23, 2020, on emergency measures to deal with the Covid-19 epidemic, Law No. 2020-289 of March 23, 2020, on the amended finance bill for 2020, anda series of ordinances. These measures have also been the subject of particularly intense legislative and regulatory activity since March 2020 in order to adapt them to the constantly evolving crisis (for more details on the financial support measures for businesses facing the Covid-19 health crisis and the committee monitoring these measures, see the appendix).

This note reviews the four key measures of this support plan: partial activity, the solidarity fund, state-guaranteed loans, and the deferral of social security contributions.

Partial activity

Short-time working is an employment protection policy that allows businesses facing economic difficulties to reduce the hours worked by all or some of their employees, while providing compensation for these hours not worked, co-financed by the business and the public authorities (for more details on the evolution of this scheme during the Covid-19 health crisis, see Table 2 in the appendix).

Solidarity Fund

Established by the State and the Regions in response to the Covid-19 health crisis, the solidarity fund aims to prevent, through the payment of aid, the cessation of activity of small businesses, micro-entrepreneurs, self-employed workers, and liberal professions that have been subject to administrative closure measures or have experienced a significant drop in turnover as a result of lockdowns.

State-guaranteed loan

With a total budget of €300 billion, state-guaranteed loans are intended to support bank financing for all businesses located in France.

Businesses can apply for this loan through their usual bank or through lending platforms that are certified crowdfunding intermediaries. The loan amount can be up to three months of 2019 revenue or two years of payroll (for innovative businesses or those established since January 2019). The company has up to six years to repay the loan.

Banks have committed to distributing these loans on a large scale, at cost, in order to provide immediate cash flow relief to businesses and professionals.A large company applying for a state-guaranteed loan also undertakes not to pay dividends in 2020 to its shareholders in France or abroad and not to buy back shares during 2020.

Deferral of social security contributions

Employers and self-employed workers whose business is directly or indirectly affected by the crisis may defer all or part of their social security contributions, provided that the declarations are filed by the scheduled dates. Self-employed workers may also apply for exemption from paying these contributions and/or for exceptional financial assistance.

Changes to these measures in response to the COVID-19 health crisis

Initially intended to be temporary, these various measures have been extended and adapted in line with developments in the Covid-19 health crisis and according to the sectors affected. Thus, while the public authorities have gradually withdrawn from financing partial activity for companies resuming activity since June 2020, they have maintained 100% coverage for sectors affected by (re)lockdowns and have introduced the long-term partial activity scheme. The solidarity fund, initially reserved for companies with fewer than 10 employees and compensating them for losses of up to €1,500, was targeted at certain sectors between July and September 2020. It was then extended twice: from October 2020, to companies with fewer than 50 employees in certain sectors particularly affected by the crisis, granting them up to €10,000 per month; then, from December 2020, to all companies in these sectors, with aid of up to €200,000 per month (or even more under the fixed cost coverage scheme introduced on March 31, 2021), subject to certain conditions. In addition, the amounts and ceilings for this aid, as well as the thresholds in terms of loss of turnover, are redefined every month and adjusted according to sector. Companies have been granted an additional one-year deferral for the repayment of their state-guaranteed loans, which have also been extended until June 2021. The deferral (or even exemption) of social security contributions will continue until August 2021.

It should be noted that, from an economic perspective, partial activity and the solidarity fund constitute subsidies to companies, insofar as the corresponding amounts are definitively acquired by them, while the deferral of social security and tax contributions and the state-guaranteed loan are in the nature of loans (or cash support), requiring repayment in the short term for the former and in the longer term for the latter.

3. Extent of recourse to support measures

According to the key figures and progress report of the committee monitoring the implementation and evaluation of financial support measures for businesses facing the Covid-19 health crisis, published on March 10 and April 20, 2021, respectively, a total of €200 billion was mobilized between March 2020 and February 2021 for the four main support measures, representing 9% of French GDP, broken down as follows in Figure 1: €200 billion was mobilized under the four main support measures, representing 9% of French GDP, broken down as follows in Figure 1:

Figure 1: Breakdown of support measures

Source: France Stratégie and Dares.

Businesses and sectors particularly affected by the Covid-19 health crisis and unable to adapt their activities to the health context (public reception, inability to implement new ways of working such as teleworking, flexible working hours, inventory management, , etc.) are also the ones that have made the most use of support measures in the period from March 2020 to February 2021.

The accommodation and catering sector made the most intensive use of these schemes: while it accounts for just over 5% of salaried employment, it accounts for 22% of partial activity, 28% of the solidarity fund, 8% of state-guaranteed loans, and 8% of social security contributions remaining to be recovered. In addition, while they account for 51% of salaried employment, the retail, auto and motorcycle repair, specialized, scientific and technical services, construction, and manufacturing sectors account for 52% of partial activity, 33% of the solidarity fund, and 64% of state-guaranteed loans in terms of amount.

Furthermore, despite their financial strength, small and medium-sized enterprises in France have also been affected by the crisis. As a result, the measures have mainly been used by small businesses: between 55% and 57% of employees placed on partial activity between November 2020 and January 2021 are believed to work in companies with fewer than 50 employees, 75% of state-guaranteed loans were granted to companies with fewer than 250 employees, and 37% of the amount of social security contributions remaining to be recovered was from companies with fewer than 20 employees.

The geographical distribution of the schemes largely depends on their economic weight and the composition of their productive fabric. In this respect, the Ile-de-France region, traditionally the driving force behind the French economy and particularly affected by the crisis, comes out on top.

These measures therefore appear to be used in line with their objectives, enabling initially viable companies to cope with this economic shock and maintain their activity in the long term. In addition, among the companies that have used at least one measure, a substantial proportion have used only one measure. This sparing use of public aid by companies suggests that these measures have little windfall effect, as companies are not using them in a particularly strategic manner. However, extending and adapting the measures in response to the evolving crisis, thereby encouraging their widespread use, could call their effectiveness into question.

4. Assessment of the effectiveness of support measures

The resilience of a number of economic indicators (low number of business failures and job losses) in view of the scale of the Covid-19 health crisis, as well as the results of ex ante evaluations, in particular that carried out by the Directorate General of the Treasury, reveal the impact of support measures on the situation of businesses. This study uses a micro-simulation exercise to show the effectiveness of partial activity, the solidarity fund, and the deferral and exemption of social security contributions[3] on the liquidity and, consequently, the solvency of businesses. In fact, the increase in the number of businesses becoming illiquid and insolvent compared to a year without crisis was 8.4 and 3.0 points, respectively, compared to 20.4 and 8.3 points in the absence of public support. These results are mainly driven by the partial activity scheme and, to a lesser extent, by the solidarity fund.

However, rigorous ex post evaluation of these schemes faces several obstacles:

• The difficulty, particularly given the universal nature of these schemes (with the exception of the solidarity fund, whose eligibility criteria were initially restrictive but have since been relaxed), of identifying a control group, consisting of counterfactual companies that did not benefit from these schemes, with which to compare the treatment group;

• The multiplicity of measures, their interdependence, and their successive reforms in response to the prolongation of the crisis.

• The lack of hindsight on the data.

Academic literature has highlighted the beneficial effects of measures such as partial activity (Cahuc, Kramarz, and Nevoux, 2021) and state-guaranteed loans (Brown and Earle, 2017; Barrot, Martin, Sauvagnat, and Vallée, 2019) on the employment of beneficiary companies, particularly those under financial constraints or facing a significant decline in activity. The decline in activity directly caused by successive lockdowns, the prolonged closure of establishments open to the public and whose activity is considered « non-essential, » the inability of certain sectors to maintain their activity while ensuring the safety of their employees, the economic exposure of sectors that have emerged from lockdown to sectors that remain in lockdown (reduction in outlets and orders), and the great uncertainty surrounding the terms and speed of the exit from lockdown have therefore made it necessary to maintain such measures in the short term.

However, while the use of these measures plays a crucial role in the recovery of activity by enabling companies to safeguard their business and jobs, their widespread use can have adverse effects, particularly outside periods of crisis and when used for prolonged periods. However, these effects remain relatively minor compared to the benefits of these measures in times of crisis. In addition, these measures make it possible to preserve business activity and jobs at a lower cost than other measures such as wage or hiring policies.

However, while state-guaranteed loans and the deferral of social security contributions ease the financial constraints on businesses by relieving their short-term cash flow, these measures and their extension, by encouraging over-indebtedness and reducing businesses’ equity and investment capacity, weaken them in the medium term. In fact, companies will eventually have to repay both the principal and the (albeit low) interest associated with the state-guaranteed loan, as well as the total amount of social security contributions deferred, even though they are facing a decline in turnover, rigid costs, and low margins. Unless there is a strong recovery in activity, they will therefore have to resort to recapitalization or restructuring (adjusting the size of their premises, relocating production, anticipating customer and supplier defaults, etc.), at the risk of going bankrupt. According to the Banque de France, 6-7% of companies could face difficulties when the support measures are lifted, and between 4.5-6% of state-guaranteed loans granted since the start of the crisis may not be repaid, with 90% of losses covered by the state. Beyond the risk of irrecoverability for the State and banks, potential business failures impose a number of costs on society as a whole: financial costs for the entrepreneur, their shareholders, and suppliers; financial costs for banks, which, in addition to State-guaranteed loans, also hold other outstanding loans to businesses; social costs for employees, unemployment insurance, and social security; and congestion in commercial courts, which will no longer be able to support these companies.

In addition, these measures may be associated with windfall effects: some companies that are not in difficulty may be tempted to use them for reasons of profitability, without any gain for their finances or their employment. In this respect, some companies have been able to use state-guaranteed loans as a precautionary and comfort savings measure.

Furthermore, these measures may have given rise to displacement effects: some companies experiencing structural difficulties may have been tempted to use them, thereby delaying or even preventing the reallocation of their workforce to more productive sectors of activity. These negative effects lead to a loss of aggregate production relative to the social optimum (Cahuc and Nevoux, 2018; Cooper, Meyer, and Schott, 2017). These support measures could therefore amplify the zombification of companies. According to France Stratégie, these mature companies, which are unable to cover their costs, represent around 5.6% of all companies in France over the period 2013-2015. By hindering destructive creation, this phenomenon could be an obstacle to a sustainable economic recovery.

Finally, the massive use of these measures has significantly increased public and social debt, which could increase even further in the event of numerous business failures and as a result of calls on the state-guaranteed loan guarantee and non-recovery of social security contributions.

Therefore, after encouraging the use of these support measures in response to the Covid-19 health crisis, the public authorities have embarked on ambivalent reforms. On the one hand, they have initiated reforms to phase out these measures in order to limit their adverse effects and support economic recovery, which they have accompanied with controls. On the other hand, they have implemented provisions extending their use beyond the crisis, thereby potentially exacerbating the adverse effects associated with them. Thus, while the general partial activity scheme has been made less favorable, with compensation adjusted according to the difficulties of the sectors, the reduction in the maximum duration of use, the implementation of controls, and the introduction of individualization, the specific long-term partial activity scheme introduced on July 1, 2020, offers sectors experiencing structural difficulties over long periods more advantageous conditions than the common law scheme. According to the Court of Auditors, although the solidarity fund has proven to be an effective mechanism for supporting businesses during the crisis, its extension, its expansion to larger companies, and the increase in the amount of this aid would allow companies that do not need it to benefit from it and could thus be associated with windfall effects. The Court of Auditors warns in particular against the accumulation of aid, which could lead to companies receiving compensation in excess of the damage suffered, and recommends, in addition to the introduction of more stringent checks on aid already undertaken by the public authorities, a strengthening of controls, accompanied by penalties in the event of fraud. Similarly, the extension of the state-guaranteed loan was accompanied by banks granting this facility more readily to fragile companies.

Conclusion

Financial support measures for businesses have proved effective in helping them to overcome the Covid-19 health crisis, insofar as these schemes have enabled them to preserve their activity and jobs, and moreover at a lower cost than other measures. However, while these policies need to be maintained in the short term to support economic recovery, their widespread use can have adverse effects, particularly outside periods of crisis and when used for prolonged periods.

In addition to the measures already initiated by the public authorities to phase out these schemes, certain additional provisions could improve the effectiveness of these business support measures. For example, under the partial activity scheme, the payment of hours not worked directly by the public authorities to employees would alleviate the financial constraints on businesses.

The introduction of minimum thresholds for triggering recourse in terms of the proportion of the workforce and/or hours concerned could make it possible to better target businesses in difficulty and establish objective criteria for the needs of the business (Cahuc, Kramarz, and Nevoux, 2021).

In addition to reducing compensation by the public authorities, it would also be possible to lower the ceiling for this reimbursement in order to reduce the cost to the public purse while supporting businesses.

In the longer term, the introduction of a bonus-malus system whereby companies contribute to the financing of the measure in proportion to their financial weight in the system, similar to the unemployment insurance system from 2021 onwards, would also help to mitigate the adverse effects of the measure.

It would also be possible to ensure that companies have used all the tools at their disposal before applying for partial activity compensation and to prohibit hiring during the period of recourse.

As for state-guaranteed loans, converting them into operating subsidies and/or conditional advances could be a solution for the most affected sectors. However, although this possibility has been clarified by the European Commission, it raises issues of fairness and distortion of competition between companies.

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APPENDIX

Financial support measures for businesses affected by the Covid-19 health crisis and monitoring committee

A committee to monitor the implementation and evaluation of financial support measures for businesses affected by the Covid-19 health crisiswas created by paragraph IV of Article 6 of Law No. 2020-289 of March 23, 2020, on the amended finance bill for 2020, amended by Law No. 2020-473 of April 25, 2020. Reporting to the Prime Minister and chaired by Benoît Coeuré, this committee is composed of representatives of the National Assembly and the Senate, the Regions of France, the Assemblies of the Departments of France and the Associations of Mayors of France, representative employer and trade union organizations, the Court of Auditors, and State administrations. Its secretariat is jointly provided by France Stratégie and the General Inspectorate of Finance. The committee also benefits from the support of the central administrations of the ministries directly involved in these measures.

Of all the financial support measures, 17 schemes, listed in the table below, fall within the committee’s remit, which focuses its analysis on the four main measures: partial activity, the solidarity fund, state-guaranteed loans, and the deferral of social security contributions (in bold).

Table 1 – Summary of the 17 financial support measures for businesses affected by the Covid-19 health crisis

The committee’s work focuses on compiling statistics on the use of these four main support measures and assessing their effectiveness, particularly in light of the scale of the crisis and their impact on public finances. This work is presented in the form of key figures(^{1st and2nd quarters}of 2021), a progress report(^2nd quarter of 2021), and a final report (scheduled for the^3rd quarter of 2021).

Table 2 – Changes in the partial activity scheme during the Covid-19 health crisis

It should be noted that the specific long-term partial activity scheme is not strictly speaking a financial support measure for businesses facing the Covid-19 health crisis, but is part of the « France Relance » plan.