Governments must nurture corporate optimism for a sustained recovery

Supporting businesses in a rapid recovery will boost much-needed tax revenues and help governments deliver on their post-pandemic goals.

According to the latest EY Global Capital Confidence Barometer (pdf), businesses appear to be surprisingly upbeat about their future and the prospect of a strong rebound from the current pandemic-induced downturn. Survey results also reveal that most businesses have responded proactively, using the COVID-19 pandemic as an opportunity to undertake full strategy reviews and invest in making changes to improve productivity and promote growth.

This optimism is welcome news for governments that are facing multiple challenges post-pandemic, including restoring economic growth, tackling socioeconomic inequalities and repairing public finances. In particular, it suggests that the stagnation and austerity that followed the 2008 global financial crisis need not be repeated.

The pandemic has compelled CEOs and the C-suite to examine every aspect of their business. The positive news is they are emboldened to invest across both growth-oriented and operational elements, with digital transformation (63% of respondents plan to increase investment) and customer engagement (57% of executives plan to increase investment) at the forefront.

Many companies are focusing their strategies on identifying opportunities to invest in technology, digital capabilities and talent. Despite ongoing uncertainty, 49% of respondent companies are planning to make acquisitions within the next 12 months. Nearly two-thirds (65%) of those who plan to acquire are looking for assets internationally rather than domestically.

Governments must nurture and capitalize on this business optimism to achieve sustainable recovery

This business optimism, if sustained, is good news for governments, as a confident business sector and a rapid corporate recovery will boost much-needed tax revenues and help restore public finances. However, the expected prolonged squeeze on profitability, and the potential for industry consolidation through increased M&A activity, may impact jobs in specific sectors and mean that the labor market recovers more slowly.

Supporting corporate optimism to speed up government recovery goals

Governments need to decide what policy steps to take to nurture positive business sentiments and capitalize on corporate optimism to help deliver on their own post-COVID-19 objectives. In EY’s Future of Government series, we explore how governments could approach four key recovery goals:

1. Regenerating economies
2. Reshaping public services and revitalizing local communities
3. Retaining and extending innovative ways of working
4. Repairing public finances

5. Support innovation and the transition to a digital economy

Investment in R&D, innovative technologies and, in particular, digital and green technologies will be vital to international competitiveness and long-term, sustainable economic growth. As well as public sector investment and support for innovation, such as university funding, financial and practical support for start-ups and high-growth SMEs, governments have an opportunity to capitalize on the private sector’s obvious appetite for investment. It can use tax incentives, matched funding and favorable finance options to channel private sector investment in these critical future growth sectors.

The shift toward digitization of product and service delivery is creating whole new digital business models and increasing the importance of digital-platform players in the economy. As a result, governments will want to confirm that their regulations, and worker and consumer protections and tax regimes, adequately cover the shift to a more digitized economy.

6. Avoid relying on onerous tax increases to repair public finances

The unprecedented fiscal response to supporting and stimulating the economy throughout the pandemic has led to high levels of public debt. Governments will eventually need to tackle this debt, and taxation will have to play its part. However, governments should avoid the temptation to introduce heavy-handed tax rises that risk disincentivizing investment and dampening business activity. Instead, they should recognize that strong economic growth is the best route to addressing the debt issue and revise tax regimes to support investment, R&D and upskilling the workforce.

7. Encourage inward investment

Countries, regions and cities can boost their economic growth by increasing their attractiveness for foreign direct investment (FDI). This might involve, for example, offering tax breaks to companies relocating their operations, or accelerating approvals for building a new plant.

As the survey shows, many companies are looking to overseas acquisitions for growth and access to innovation. This could be very welcome, with M&A rescuing struggling companies that may otherwise fail, safeguarding jobs and leading to new growth opportunities.

Clearly, encouraging overseas investment is not without risks. Governments may fear the loss of key assets or innovation capacity to foreign acquirors, or that economic recovery gains will go to the investing country. Governments approving significant M&A deals need to verify they will not negatively impact market competitiveness, national security, critical infrastructure, data privacy or security, or long-term competitiveness in high-tech industries. Rather than impose a block on inbound M&A, governments can attach conditions to the approval of deals, such as commitments to safeguarding jobs or investing in reskilling or in the local community.

8. Strive for geopolitical stability to de-risk strategic investments

In addition to the global public health crisis, political risk and uncertainty around political decisions, events or conditions at the geopolitical, country, regulatory or societal level have impacted the investment decisions of many companies. With greater clarity comes greater confidence to invest. As the new UK-EU trading arrangements become clearer, as the US Biden Administration’s foreign policy emerges and as international trade flows begin to normalize, we can expect to see an increase in strategic investments, which in turn will accelerate the recovery.

Conclusion

These survey results offer governments a cause for hope as well as a springboard for action. Taking the right steps now will help them overcome their post-pandemic challenges and set a positive course for the future.