Cutting taxes will likely be the least effective way in helping lift the economy out from the Covid-19 jobs crisis because there is no guarantee that people who fear a second wave of pandemic cases won’t just save rather than spend the money, ESRI professor Kieran McQuinn has said.
His comments come as Finance Minister Paschal Donohoe prepares to unveil a jobs package designed to prevent large levels of long-term unemployment scarring Irish households, for the second time in less than a decade.
Business groups say Minister Donohoe’s estimated €6bn in measures may cost the exchequer as little as €3bn upfront because the bulk of the cost entailed in covering loans against default in any full-throated credit scheme won’t be triggered if it does its work. Economists around the world are trying to figure out the best ways for governments to help boost their economies. In Ireland, over 1 million people need the pandemic unemployment payment and wage-subsidy scheme to make ends meet.
However, Prof McQuinn said boosting consumer spending at this stage may only result in more savings because people will be wary of a second pandemic wave or be uncertain over their own jobs, as unemployment remains at over 10% at the end of the year.
“While understandable in trying to assist certain sectors, the danger in giving a tax break or certain resources is that people are just going to be very unsure about making investment decisions,” Prof McQuinn said.
Instead, investing in housing “would be a better bet”, he said, as housing supply will likely become more pressing after the disruption in housebuilding caused by the pandemic.
Fergal O’Brien, director of policy at business group Ibec, said that cutting the Vat rate would, however, help businesses “get some sort of margin” as they struggle with the costs of reopening. He said that “a simple grants-based model”, that has showed its worth in Switzerland, Germany, and the UK, during the recent crisis months should be part of a stimulus package.
Securing a loans scheme that is 100%-guaranteed by the State would be key in lowering interest rate costs for Irish businesses, Mr O’Brien said.