Combatting the Weakness of Investment: ETH Researchers Propose Adjustment of the COVID-19 Lending Programme

The COVID-19 pandemic has triggered a more massive economic downturn worldwide than was seen during the last major crisis, the financial crisis. In addition, there is a high degree of uncertainty about the future of the economy. Consequently, companies are either postponing their planned investments or abandoning them altogether, as the latest KOF Investment Survey shows. This reduction is even more pronounced among SMEs than among large companies.

There are no signs of any recovery in corporate investment in the short term. In its recently published economic analysis, KOF is forecasting a decline in investment in equipment and machinery of around 13 per cent in 2020. However, a healthy level of investment is important for a rapid recovery and stable growth in the economy. A low level of investment prevents the build-up of the capital stock and thus the increase of potential output. In addition, weak investment has negative repercussions for the labour market: if firms build-up less physical or intangible capital, they generally hire fewer workers.

Current lending programme unsuitable for combatting the weakness of investment

The Swiss government reacted quickly and effectively to the economic slump by launching the COVID-19 lending programme. This programme has helped prevent a wave of bankruptcies so far. In its current design, however, the lending programme cannot combat the emerging weakness in investment. For example, these loans may only be used to cover ongoing operating costs and not for capital investment. For this reason, the three ETH researchers Hans Gersbach (Professor of Macroeconomics, Innovation and Politics), Heiner Mikosch (Section Head, KOF Institute) and Jan-Egbert Sturm (Professor of Applied Macroeconomics and Director of the KOF Institute) have proposed an adjustment to the COVID-19 lending programme.

Specifically, they propose the following changes:

1. The COVID-19 lending programme should be extended by one year (until 31 July 2021). The total amount of CHF 40 billion approved so far will remain as a ceiling.
2. All approved loans can now also be used for capital investment, for example for equipment and research & development.
3. Only part of all approved loans will now be backed by the Swiss government. The lending bank will bear the remaining credit risk. The proportion of the guarantee provided by the government will also decrease over time.
   
4. The lending bank must maintain its existing credit exposure to the borrowing company – which is not backed by the federal government – in full until a certain date.

Government support can accelerate economic recovery

In the event of a pronounced weakness in investment and underutilisation of capacities throughout the economy, the economic recovery process can be accelerated by temporary partial guarantees from the government. This will not place a heavy burden on the public finances. Moreover, the proposed gradual reduction of government guarantees should lead to investments being started sooner rather than later, thus accelerating the economic recovery.

If, despite these proposed adjustments, a persistent investment crisis occurs, further temporary measures would have to be considered. Possible options would be tax reliefs, such as an extension of the possibility to offset current losses against profits from previous years, faster depreciation options for investments, and financial support for research & development.. However, this would cost the government considerably more than the present proposal.