Will the Govenrment’s Aid be Enough?

The new coronavirus restrictions are expected to once again impact the hospitality industry negatively. The government has therefore offered tax cuts and financial aid to firms; for the restaurant and related industries 50% of gross wages, for hotels, 80% of missed revenue from bookings. Will this keep the sector afloat?

Feast on this

In restaurant industry establishments (including coffee shops), only employees can be on the premises. Anyone else can only enter the establishment for the time it takes to receive food and beverages available for take-away. This does not apply to restaurants and cafeterias at workplaces, restaurants and bars in hospitality establishments where only guests are served, school canteens and cafeterias where only students and staff are allowed to eat, and restaurants and cafeterias in healthcare facilities.

In this and other industries, financial aid covering 50% of employees’ gross wages can be requested, provided that their employment is not terminated, and their wages are paid in full. The maximum an employer can receive for a given worker is 150% of the minimum wage. Establishments in this industry are also given exemptions from paying social contribution tax and professional training contributions for November.

Stay Positive

It is now forbidden to stay at hotels unless one works there or is traveling for business, economic, or educational reasons. Other exceptions include military, police, or healthcare personnel carrying out their official duties.

The government will reimburse hotels for 80% of the net income lost from reservations canceled due to the new regulations over the first 30 days following their institution. This is provided that they retain all employees for the entirety of November and pay all of their wages. This scheme also has a theoretical ceiling, but few hotels can even come close to hitting it.

In the hospitality industry, it is the obligation of establishments to ensure that regulations are complied with.

Hard to swallow

Many businesses in the restaurant industry are on their last legs; they have consistently been one of the hardest hit by the pandemic around the world. The current regulations are another big blow, regardless of the fact that some in the industry agree that the nation’s health is tantamount. Although some establishments managed to transition to food delivery quite well and keep afloat, the business models of other businesses, such as coffee shops, are not quite conducive to that way of operation.

Unfortunately, the government’s aid is based on reported income, and uniquely unsuited to address concerns in this industry in Hungary. This is because of the importance of tips and the prevalence of “gray employment,” which means that employees are officially not hired for the wages they are actually paid, or work more than they purportedly do so. Gray employment is of course tax fraud.

Putting that aside for a moment, on the one hand, right now, this means that 50% of workers’ gross reported salary will be much less than half their actual income. With the other burdens on employers such as rent, many businesses will operate at a loss under the momentary conditions,  and their employees will barely get by on the wage their employers can give them.

On the other hand, clearly, if you cannot afford to legally pay your employees as much as they ask for, wages should either be lower in the industry or you should not be in business, or else perhaps prices could be higher or quality lower. The fact that many restaurants and coffee shops employ illegal methods of gray employment means that those who play by the rules and employ their workforce legally are at a disadvantage. For those that wish to know why, let me explain below, for those that do not, skip ahead to the next section.

Fact

In order to maintain competitive wages with those who commit tax fraud, the actual labor costs of those who comply with the law are much higher, since they pay tax and contributions after the entire amount. If everyone played by the rules, the same salary expenditure would result in less money in employees’ pockets at places that cheat on taxes now, in line with how much the industry and legal business models actually allow. Those that comply with the law would therefore not have to pay unnaturally high wages in order to remain a competitive employer.

Illegal practices thus artificially drive up wages in the industry, and give rule-breakers an unfair competitive advantage.  As the labor expenses of those who do not utilize gray employment practices have to be higher in order to attract qualified workers, they either operate with a smaller margin, or offer lower quality for the same price at the same economy of scale. They can also choose to hire lower-quality workforce, and put up with high, costly turnover once they are trained and are hired by other places where they can earn more. Since margins are notoriously low in the industry at 4-5%, this often means legal businesses would not even be able to compete with those that break the law.

If, however, the market were to somehow produce similar wages anyway, and those who commit fraud would simply be unable to do business legally under these conditions, then they should clearly not be operating. Alternatively, prices would have to be higher across the board, and then if that were too high for consumers, the market would correct itself and we would be back where we were before. Optionally, the quality for the same price could be lower, which is analogous to the previous situation, except it could change the structure of the market.

Only if for some reason there was a significant market failure, which in this realm does not at all appear to be the case, that resulted in this practice would the authorities be responsible for not correcting that failure. Given all of the above, one might wonder how much sympathy they can have for the current situation of employers and employees who break or skirt the law.

No holiday for the hotels

Tamás Flesch, president of the Association of Hungarian Hotels and Restaurants told economic news outlet VG that due to the second wave of the coronavirus, the Christmas-New Year’s period “cannot be planned,” they can only hope that holiday reservations start coming in at the last second.

Room prices have remained mostly stable so far, but Flesch noted with alarm the recent tendency among some hotels of advertising extremely low prices to try and counteract the lack of guests. He said that since there were no reservations made by foreigners for the holiday season this year, many hotels will decide to cease operations despite the government’s offer of aid.

The main issue with the way the reimbursement scheme is constructed is that many potential guests took to booking last minute due to the expectation that regulations might change. Therefore few rooms were booked in advance, and since the aid is based on reservations, the actual amount will not be enough to keep hotels afloat for long (or be representative of either actual expected income).

All this comes after gross income in the industry was down 52% over last year between January and September due to the coronavirus anyway.

Flesch remarked that many restaurants that rely on foreign visitors will also close.

Small bites

Overall, according to a survey of 280 small and medium-sized enterprises (SMEs) by MiniCRM, about a twelfth of such businesses say they will not survive the current regulation for more than a month. About a third of all respondents said they would not survive more than 2-3 months of the current state of affairs. A tenth of SMEs feel they will certainly have to lay off employees, while a quarter say it is possible that they will have to let go of some people.

Larger enterprises are more optimistic than smaller ones. Among firms with over 50 employees, only 10% reported a significant drop in revenues over the spring, while amongst those with 10 people or less, the same number was 46%.

Featured photo illustration by Szilárd Koszticsák/MTI

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