Addressing the current economic crisis will be the biggest challenge of our time

Jonathan Faurie
Founder: Turnaround Talk

In 1930, the world reached a economic turning point when the stock market crash f 1929 caused the Great Depression. The 1929 stock market crash was so significant that it sent Wall Street into a panic and wiped-out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. Despite the significant impact of the 2008 Global Financial Crisis, the closest we have come to experiencing an economic crisis like the Great Depression has been the crisis caused by Covid-19.

We were starting to see the green shoots of economic recovery before Russia decided to invade the Ukraine which complicated challenges that were caused by the Pandemic. Some of the challenges that have been complicated include the Global Supply Chain Crisis and energy crises that are being experienced in many countries around the world.

How do we address this economic crisis? A recently published article by PwC tries to answer this question.

Covid brought a new kind of economic crisis

The article points out that Covid-19, like war, created human, economic and fiscal carnage. Deficits, which were already large in 2020, now stand at levels not seen for more than 80 years. And even when we start to return to some semblance of normalcy, governments will need to continue investing substantial funds to repair the pandemic’s damage, while also laying the foundations that will enable societies to tackle longer-term challenges, such as income inequality and climate change.

In the face of Covid-19, governments around the world have taken on levels of debt not seen for decades.

The article points out that more debt is the obvious short-term option with interest rates so low, but tax will be important in rebuilding national balance sheets in the long run. The perennial question remains: what should be taxed, and how? Even before COVID-19, debates about tax were fractious. Mounting fiscal concerns haven’t helped, and discussion seems stalled at both the national and the international level.

The author of the article, Carol Stubbings, took up the role of global leader of tax and legal services at PwC mid-pandemic. PwC advises companies and individuals across the full spectrum of tax issues, working to understand the obligations within the tax system and ensure they are met. This gives them a rare insight into broad-based concerns and priorities.

“Looking at this landscape, my concern today is the confrontational nature of many discussions of tax systems. To ease these frictions, I believe we need to embrace the idea of compromise in the spirit of Bretton Woods. Compromise is likely to yield a more stable tax equilibrium that will engender the certainty executives yearn for. More than 1,000 business leaders who attended a series of regional symposia we hosted on tax towards the end of last year said uncertainty—not rates—was their single biggest concern. They’re more likely to get certainty if they strive to shape the tax system in collaboration with policy-makers, who also must work with one another to harmonise national and international interests,” says Stubbings.

What impact will this have on the current economic crisis? Will it complicate it or ease it?

Tax will be a major challenge in the future
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Global vs. national

The PwC article points out that Tax can be seen as a largely domestic issue; after all, most tax rules set by a government apply to individuals who live in that state and businesses that operate there. But governments always have an eye on the international landscape. They may want to attract investment, encourage people to work, or use tax policy to influence cross-border trading patterns by either encouraging or discouraging certain transactions.

Understanding how a country’s tax system is seen internationally, the impact it has on other countries and its potential to create harmony or division is critical to having a tax system that generates trust and promotes certainty. Some of the thorniest tax issues relate to cross-border trade and companies that operate in different jurisdictions. The taxes in question generate outsized media and political attention compared to the revenues they raise, and achieving compromise here would increase the capacity of negotiators and those at the table to concentrate on more strategic areas that have greater potential to increase revenue.

The article adds that short-term policies by one country can end up doing more harm than good in a hypermobile world. Discussions about aligning tax systems internationally have been going on for decades, and now more than ever as we start to recover from the multifaceted effects of COVID-19, there is merit in compromise to improve trust and certainty for individual and corporate taxpayers around the world. Frankly, looking at national tax policy through an international lens might bring a more clear-sighted approach to policy-making.  This will address some of the challenges associated with the economic crisis.

A fairness agenda in a time of crisis

Fairness, and the perception of it, is vital in designing tax systems for the future. If taxpayers do not view taxation as fair, they are less likely to comply voluntarily with their tax obligations. This increases the time and effort that has to be spent on enforcement and deprives governments of tax revenues.

The amounts of tax companies pay and where they pay them is already an emotional issue. The evidence shows that the long-term effective tax rates of many large enterprises are approximating statutory corporate tax rates in OECD countries. Still, perceptions remain among the public that corporations aren’t paying their share, to the detriment of schools, hospitals and other underfunded public goods.

Many people believe the debt levels created by the pandemic could create a political environment more amenable to making significant changes to tax systems. Responding to the pressure to be more transparent about tax is one area where progress can definitely be made, particularly when it comes to environmental, social and governance (ESG) metrics. And greater transparency will help towards building trust. Although there is no common global standard for how businesses should report their ESG metrics, the World Economic Forum, with support from PwC, Deloitte, EY and KPMG, recently published a universal set of stakeholder capitalism metrics that includes tax contribution reporting.

Financial management is becoming increasingly tough
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The digital effect on the economic crisis

The article points out that more than 135 countries are coming together under the auspices of the Organisation for Economic Co-operation and Development (OECD) to tackle international corporate income tax issues, but it is only a start. The matter of how to tax in a digitalising economy is still hotly debated, and showcases the obstacles and tensions inherent in tax policy discussions.

If implemented, the OECD plans could raise up to $100bn worldwide. This sounds substantial, but it is a drop in the ocean. The US, to name just one country, spent more than $3tn on Covid-19 stabilisation and relief in 2020. Nevertheless, global consensus about a redesign of the system is key if we are to avoid tax chaos which will complicate any economic crisis.

The OECD just completed the latest round of discussions on this redesign, and there still is considerable debate and uncertainty.

Tax is complicated and interconnected. Balancing competition and consensus are hard. And governments have significant incentives to undertake short-term actions that are driven by local demands at the expense of international collaboration. Nonetheless, the spectre of years of wrangling over tax should serve to bring people together. Heavy-handed tax rises in one area can lead to problems in the future. Better to compromise now and stop the patchwork of isolated actions that lead to tit-for-tat tariff wars—which undoubtedly hurt people more than companies and slow the rate of progress.

The role of turnaround professionals

When it comes to addressing the current economic crisis, turnaround professionals have a greater role to play then they realise.

On the surface, addressing the economic climate may seem difficult. In reality, it may prove to be a logistical nightmare. Companies not only have to deal with customers that have shifting consumption habits, they have to adjust their operating models to embrace digitisation. And digitisation does not stop at establishing an online presence, manufacturing and supply chain management need to be digitised in order to address the demands of the customers of the future.

This costs money and innovative thinking. Turnaround professionals first need to address any liquidity issues that a company may have before engaging around management issues. Addressing the current economic crisis will be the biggest challenge of our time and turnaround professionals will be key role players.