The State can afford the huge expenditure bill and hit to revenue from the Covid-19 crisis for six months but the sustainability of the finances starts to come into question if the pandemic fallout extends for a longer period, warns Seamus Coffey, the former chair of the budget watchdog.
It comes as Taoiseach Leo Varadkar co-signed a letter with the leaders of eight other European nations in a bid for the eurozone to consider issuing so-called corona bonds and for the EU to shoulder the huge fiscal costs entailed in fighting the pandemic and saving millions of jobs from the economic storm.
The letter shows there is a growing political drive behind the idea for the eurozone, for the first time in its history, to issue eurobonds — albeit for the specific project of raising the huge borrowings that will be required over years to defray the Covid-19 costs.
Signatories to the letter include Emmanuel Macron of France, and the leaders of Italy, France, Belgium, Greece, Portugal, Spain, Slovenia, and Luxembourg.
But significantly, German chancellor Angela Merkel and the Dutch leader, who have long resisted the eurozone shouldering any scheme for mutualised bond-debt sharing, were not part of the group.
The National Treasury Management Agency said Ireland was “well placed” to tap debt markets in the coming years to meet the costs entailed in fighting the pandemic.
There is growing concern, however, among leading economists about the huge costs and the drop of tax revenues facing the State.
Amid the economic fallout, Mr Coffey, who led the Irish Fiscal Advisory Council until December, said “there are huge sums involved”, including the €3.7bn cost over only 12 weeks in the measures the Government announced in recent days to support incomes.
The hit to the budget could amount to €15bn over six months — as expenditure surges and tax revenues slump — if the crisis extends beyond that period, he said.
“The scale is immense and that is just in terms of expenditure. We are likely to see a very significant drop in tax revenues; in income taxes because all these people are out of work; and Vat and excise duties should all fall significantly, said Mr Coffey.
“Between increased spending and a severe drop in revenues, we are looking at a huge deficit in 2020,” he warned.
“We can afford it, but doubts would begin to emerge if it went on longer than six months.”
A eurozone-wide initiative, such as issuing eurobonds, may be required to help mitigate the enormous costs across Europe if the crisis were to persist through the end of the year.
Dermot O’Leary, the chief economist at Goodbody Stockbrokers, said that the deficit this year will be around €10bn — “and that the risks are to the downside in terms of the deficit because of the difficulties of calculating the loss of revenues”.
In his assumptions, which Mr O’Leary stresses are a scenario, and not a forecast, because of the uncertainty surrounding this crisis, €6.5bn of the deficit this year relates to additional expenditure and €3.5bn comes about from the loss of anticipated revenue.
Unemployment under his assumptions could peak at somewhere between 15% to 20% this year, said Mr O’Leary.