They are now looming: the bankruptcies

What do we do with the zombies? The shopping streets are full again, the support packages are almost over and the normal economy is returning. But thousands of companies are in such bad shape that they are no longer viable in that normal economy without government support. And that will cost the state treasury billions in unpaid taxes.

With that, the long-awaited wave of bankruptcy is now looming. For two years, the cabinet spent tens of billions to keep jobs and companies afloat. Wages were subsidized and fixed costs were reimbursed, money that the cabinet knew would not come back. The situation was different for the third major support item, the tax deferral.

Entrepreneurs could defer their taxes. Companies made massive use of this: more than 45 billion in tax was deferred. A part has already been repaid, there is still 20 billion outstanding. That amount must be repaid from October, spread over five years.

But if repayments start in the autumn, a quarter to a third of companies that still have outstanding tax debts will not be able to repay this, the government expects. State Secretary Marnix van Rij (Fiscality, CDA) therefore assumes a setback of 6 billion euros, he said on Thursday evening during a committee debate in the House of Representatives. And that on a budget that already had to endure many setbacks.

Zombie companies

It is not unexpected that there would be another wave of bankruptcies. The aid packages and tax schemes also kept companies alive that were already in bad shape. These ‘zombie companies’ were already making too little profit to survive before the pandemic started.

Bankruptcy was avoided thanks to the help of the government. If that support stopped, they would still go bankrupt – and the cabinet could forget about the deferred taxes. The government accepted this risk. It was a crisis, large numbers of companies threatened to collapse, customization would take too much time. Rather generous and generic than too little and too late.

Thanks to this approach, hardly any companies went bankrupt, even compared to previous years. In 2021, Statistics Netherlands counted the lowest number of bankruptcies in thirty years. Now that the support packages are disappearing, many of those companies are still falling. 2022 will be a catch-up year, also for bankruptcies.

However, the scale of the problem is much larger than expected. The setback of 6 billion that the cabinet is now counting on is considerably more than previously anticipated: at the end of last year, the cabinet was still taking into account 1.5 billion euros in lost tax revenue.

Nice, but how?

Or should the government be merciful again? Members of Parliament asked Thursday to be mild and lenient. But how? VVD MP Thierry Aartsen argued in the debate on Thursday not to give companies five, but ten years to pay off their tax arrears. Last year, former minister Jeroen Dijsselbloem once suggested canceling tax debts on a large scale. The employers’ organization VNO-NCW also wants a longer repayment term and a ‘hardship clause’ to accommodate entrepreneurs.

Mildness is okay, the rest of the coalition argues, but a waiver or a 10-year installment is too much of a good thing. The average catering business only has a lifespan of seven years, D66 MP Romke de Jong recalled in the debate. This is in line with the attitude with which the Rutte III cabinet announced earlier that it was phasing out the support packages. The longer the packages lasted, the more they would disrupt the economy. Some companies simply go bankrupt.

De Nederlandsche Bank will also agree with this. DNB argued early on in favor of phasing out the support and also investigated the tax deferral earlier this year. That research concluded that a lot of money ended up with companies in sectors that were relatively lightly affected by the corona crisis, such as interior builders and wholesalers of building materials.

“It is worrying that they relatively often have a tax debt that is in problematic proportion to their historical profitability,” said DNB. In other words: the greatest payment risks are with companies that were already in trouble before corona.