The pandemic caused a sudden shock to the economy. Now we will need to revive it, writes Political Editor Daniel McConnell
Just who picks up the €30bn tab will be the crucial question for the next government
Just how are we going to pay for it?
That’s the €30bn question.
How do we as a country recover the greatest shock it has ever taken?
Is austerity the answer or continued record spending by the State the route to our salvation?
Since the onset of the coronavirus pandemic, the country has been jolted from a position of strong sustained economic growth, a budget surplus and record employment to the worst recession in its history.
Overnight, the economy was “put to sleep” as Taoiseach Leo Varadkar put it as he ordered the shutters to come down.
In the early days, there was naïve talk of a so-called ‘v-shape recovery’, that the economy would recover just as quickly as it shutdown.
That clearly hasn’t happened.
In placing the severest post-war restrictions on personal liberties, the Government, to its credit, moved quickly to introduce sweeping reforms in our health service and an extraordinary series of welfare supports to keep the country alive.
The hard-won gains since the last crash a decade ago scrubbed out in an instant.
To put the scale of what has happened into context, the rate of unemployment now stands at 28.2%, the highest on record, up from just 4.8% before the crisis in February, a position of near full employment.
Those claiming the €350-a-week emergency payment topped out at 602,107. This was on top of the 216,900 on regular €203-a-week jobless benefits.
In addition, there were 427,400 more workers on a wage subsidy scheme for impacted companies.
In total, therefore, more than 1.2m are or were in receipt of some form of State support at some stage during the pandemic.
In terms of overall budget numbers, what was projected to be a surplus of €2.5bn at year end will now be at least a deficit of €23bn, but more likely to be €30bn, as the extraordinary welfare supports and health sector interventions are remaining in place longer than had originally been planned for.
Despite the tremendous reversal in the State’s finances, our political leaders — those in temporary charge and those seeking to join them in government — have sought to argue a return to austerity is not on the cards.
Finance Minister Paschal Donohoe has correctly stated that unlike a decade ago, we are not priced out of the markets and we are able to borrow money and ridiculously low rates of interest.
Varadkar and Fianna Fáil leader Micheál Martin — the two men who would be Taoiseach — have both argued fiscal rectitude is not the answer, saying the last crash proved that.
“We are all Keynesian economists once again,” Martin quipped to me recently, a reference to the cornerstone of John Maynard Keynes’ philosophy that in times of economic downturn, the State should ramp up spending to prime the economy.
Eamon Ryan, of the Greens, has too beaten that drum.
The reason for such optimistic talk is all related to the fragile business of trying to put a government together.
Given how reluctant so many TDs are about actually being in government, it is clear any suggestion of austerity is being poo-pooed, publicly at least.
The trouble is that few people believe the politicians when they say such things.
The new chair of the Irish Fiscal Advisory Council, Sebastian Barnes, has warned political parties negotiating to form a government that tax increases will have to remain on the table and that “hard decisions” will have to be made to help the country’s economy recover post the pandemic.
“With all the uncertainty, no one is in a position to make such a comment (about not raising taxes),” he said.
At present, the Government is focused on the emergency phase, but over the longer period, in the next five years, it is likely that the question will have to be asked whether taxes need to go up, he said.
“It is important to keep these options on the table rather than take them off. It is important to have a strong tax base.”
It would also be important to “have a really good look at the tax system” he added as there was scope for efficiencies in many areas.
On the topic of the pension age, Barnes said it was a “huge issue” as it would cost €600m every year if the pension age was not increased.
“It is important for the government to keep all options on the table. Some hard decisions will have to be made,” Barnes made clear.
Barnes’ comments reflect the deep and growing sense of unease in the civil service as to the amounts of money being spent, week by week, day by day.
“Cheap money doesn’t stay cheap forever,” was the downbeat assessment presented by one official to me this weekend.
Word is that behind the scenes at the government talks, Donohoe has sought to introduce some element of realism to proceedings, backed up by Michael McGrath of Fianna Fáil, who recognises the scale of what is currently at stake.
All of this is, however, set against the backdrop of a feisty political left in Leinster House who not only want the spending splurge to continue but to increase.
They are demanding the emergency payments last until the end of the year, want to increase the minimum wage to €15 an hour, keep the pension age at 65, and some also want to give free bikes to everyone.
All sounds wonderful but how do we pay for it?
The Programme for Government is set to include a National Recovery Plan worth billions euro, we are told.
While it was absolutely necessary for the State to turn on the taps when the country needed it, but equally important is a credible plan to turn the tap off.
We don’t have that plan yet and we cannot wait much longer for it to emerge.
Varadkar has said there is no such thing as a free lunch, so just who is going to pick up the tab?
Covid-19 is having a deep impact on our social life as well as our economy.
Globally, economies are experiencing large and quick declines in activity.
The Irish economy is no different and it is expected that there will be a significant downturn in the overall output of the economy in 2020. At the same time, it is also expected that growth will be sharper particularly in the second half of the year where the pace of the recovery will depend on the government efforts to ease restrictions that have been in place.
As Ireland emerges from the lockdown, we have to get the economy working again and give real confidence to the SME sector by targeted measures and supports.
In the same way that the Government didn’t hang around to make decisions on public health as the virus took hold in March, we now need the same urgency of decision making in tackling the lockdown and provoke economic recovery.
A major part of retail banking services involve deposit taking, credit provision and payments processing which are often referred to as essential services.
Banks in Ireland have shown resilience since the start of the Covid-19 crisis by keeping nearly all of their services available to the public so that limited economic activity could continue, even as the banking business had to fundamentally change to cope with Covid.
With the Covid-19 shock, it is likely that income generation will decline along with reduced economic activity and credit losses will increase; however, Irish banks entered this stress period in a much stronger position.
Capital levels across the sector were 5.5% in 2007 compared to around 15% now with most lending provided by bank deposits as against interbank lending.
In addition, prudent risk management strategies have been used by all retail banks in Ireland along with increased engagement with supervisors which resulted in a much more balanced balance sheet structure which should help mitigate negative effects of the estimated downturn in economic activity.
It is true that there will be credit losses and some business as well as individual customers will default on their loans. However, Irish banks have also gained significant experience during the last 10 years in dealing with loans that may become problematic.
The average non-performing loan ratios across the sector have declined from around 17% in 2016 to around 5% at the end of 2019.
Irish banks will be better prepared this time in dealing with these loans by way of providing a range of sustainable solutions for both businesses and individuals so that the negative and temporary effect of current crisis on households and businesses can be minimised.
But as reopening of the economy starts on a gradual level, businesses will need further support. Irish banks, by speedily identifying sectors and customers that are most affected, will be in a position to provide support that these customers will require.
However, banks cannot provide all the support on their own, as we have also seen in other jurisdictions; hence, state help is also required. This crisis was not caused by bad lending or bad borrowing.
This time the role played by banks in helping business and SME customers to kick start the economy is a crucial role that banks are fully aware of.
-Brian Hayes is CEO of the Banking and Payments Federation of Ireland
There is widespread agreement in the social science community that the strategy followed by the eurozone and the EU after the last financial crisis a decade ago was fundamentally wrong.
Austerity measures were introduced, and decisions were made for political rather than economic and social reasons (all of which was clearly argued at the time by Social Justice Ireland).
The emphasis on reducing budget deficits and public debt through tax increases and spending cuts led to inadequate investment and much higher unemployment levels than was necessary. It is critically important that Ireland and the EU do not repeat these mistakes once again.
Before Covid-19, Ireland was facing many challenges which have not gone away. While the economy grew dramatically in recent years and the country now has one of the highest GDP per capita globally, those challenges remain and must be confronted in a post-covid world — climate change; poverty and inequality; inadequate infrastructure and services; changes in the world of work; the lack of real participation in decision-making; and, an underlying development model that is neither sensible nor sustainable.
There is a real danger that, faced with such a range of challenges, we will revert to the failed approach of focusing on one or two issues and hoping that resolving these will have a knock-on impact that magically resolves the others.
The biggest threat to recovery is government doing too little and cutting back on public expenditure.
In the economic upheaval that is likely to emerge in the period ahead, it is essential that priority be given to an integrated approach that prioritises investment in services and infrastructure to support development of the economy, human wellbeing and environmental protection.
Ireland needs to dramatically increase investment in the years immediately ahead. While much of this investment should be focused on once-off capital expenditure, there is also scope to invest in ongoing service development which would lead to reform, improve performance and move sectors towards a more sustainable future.
One such area is healthcare. The current focus is very much on acute hospitals. However, healthcare services will never be sustainable unless they are rooted in primary and community care. Consequently, additional investment in delivering the community healthcare networks should be part of Government investment immediately.
To achieve the level of investment required, a far more radical approach is required than what is currently proposed by the EU for Ireland (somewhere between €2-€4bn). This is far less than what is required.
A four-pronged approach is necessary:
Ring-fence the covid costs incurred in 2020 and 2021. Finance these with a very long-term low-interest loan (30 to 50 years) provided by the EU and the European Central Bank.
Move Ireland’s total tax-take towards the EU average by widening the tax base in a fair and just manner.
Make savings on expenditure but not through cuts in services or infrastructure.
Adjust the EU’s fiscal rules to cope with the post-Covid-19 reality.
-Fr Sean Healy is CEO of Social Justice Ireland
The approach of the business community to the current pandemic fits into three steps — people, business and recovery.
The people step was all about keeping people working or supported with instruments such as the wage subsidy scheme and covid payment, the business part is about ensuring the appropriate supports and grants are in place to help as many businesses as possible to reopen, and recovery is about how we find a positive from the pandemic and create the opportunity to build a better more resilient and sustainable economy.
The current Government has responded well but a strong, stable and focussed new government is essential to such a recovery.
A sector-based perspective is the next logical step for recovery and will ensure that investment by the State is well placed and impactful.
Cork Chamber has launched a Sustainable Cork Programme which will explore how each business sector can best contribute to recovery in an exemplary manner, guided by our commitment to the United Nations Sustainable Development Goals.
It is clear that sectors such as tourism, hospitality and retail are going to need a seismic boost and others, including our third level education sector, continued attention.
With sustainability as a core value for Cork Chamber, it is inevitable that our minds are never too far from the vision of a better Cork. It is clear that a stimulus-led approach, with a focus on sustainable infrastructure must be at the heart of our recovery.
Construction must be at the forefront of infrastructure-led stimulus, with housing, placemaking and sustainable mobility as a focus. The Cork Metropolitan Area Transport Strategy, and significant NDP projects such as essential roads, schools, third level institutions, hospitals and the Cork Event Centre are prime opportunities. Government must leverage all appropriate models of funding for infrastructural delivery.
Absolute commitment to the urban and rural regeneration funds is essential. Greenways, walkways, countryside access, parks, woodlands, planting and amenities must be improved and accelerated. They are key to recovery, mental health and long-term quality of life.
Quality, people focussed amenity must always be within a reasonable radius of home.
Ireland must commit firmly to the EU Green Deal as central to the recovery of Europe and a competitive Irish economy. If we fall behind any further on this agenda, we will irreparably damage our international reputation and competitiveness, not to mention our environment.
Support for the Renewable Energy Subsidy Scheme is essential to ensure business is powered by sustainable energy, which is becoming an important factor in investment decisions and forms a key part or our overall energy security.
In the very short term, we also have a huge opportunity with minimal investment to fundamentally improve our towns and cities.
We can create spaces that are enjoyable, safe and enticing, that pivot key spaces from the absolute primacy of cars, vans and trucks.
As retail, hospitality and culture return to our urban spaces, we must attract footfall. Feet fall in places that are nice to walk. Perhaps reducing our urban speed limits to 30km/h would mean we need not compete for road space at all — we can safely share it. I am confident that in this respect a real legacy will be put in place for our urban areas.
In short, there is an intensely challenging road ahead. We must incessantly speak of active recovery and every individual, business and sector thinks and acts in the most progressive manner possible to ensure that the opportunity to create a more resilient and sustainable economy is fully realised.
Quality of life, environmental awareness, and business competitiveness are intrinsically woven together.
Government must continue to act collaboratively, to actively listen and to ensure that their programmes and announcements match their stated intent and are not lost in the fine print.
Together, with this approach our stoic society and business community will become stronger and overcome.
-Conor Healy, CEO, Cork Chamber
If there is one thing we have all learnt from the last weeks of Covid-19 lockdown, it is the importance of having a safe and secure home. Our homes provide security, shape our lives and personal relationships and, crucially during this public health emergency, help keep us alive.
The Government has taken very necessary emergency measures during the crisis to prevent people losing their homes, including a temporary rent freeze and a ban on evictions. Overall, these have been successful and effective in reducing the number of people who might otherwise have become homeless during the lockdown.
The pandemic has the potential to be a turning point in the fight against homelessness. Working together with local authorities and the HSE, we have shown that it is within our capacity to provide emergency homeless accommodation to all those who need it.
We must ensure that this provision of emergency accommodation progresses to stable homes and not a return to the street or crowded shelters. Homeless shelters do not solve homelessness, and are very costly.
The Housing First approach has proven successful, by recognising that people who are homeless are better able to overcome whatever challenges they face if they first have a secure home and are then provided with supports.
The opportunity now arises to lift Housing First from being ‘one programme among many’ to being the foundational approach of Ireland’s homeless system as a whole.
Our homeless crisis is a direct result of the failings of our housing market to deliver sufficient social and affordable homes and the consequent pressure on the private rental sector.
Every effort must be made to ensure that the Covid-19 emergency does not exacerbate the housing emergency. This means that, despite the very serious challenges we face economically, continued state investment in social and affordable housing is vital.
The economic effects of Covid-19 will continue for quite some time after lockdown restrictions and social distancing measures have been lifted. The scale and size of construction projects and the timescales involved make the housing market particularly vulnerable to uncertainty and shocks.
Long-term, sustainable homes must be at the centre of our national housing and homelessness policies.
The economic recovery will depend on continuing, sustained, State capital investment in housing, and the relaxation of EU borrowing rules in this regard open up new opportunities which must be grasped.
Those affected by the unprecedented mass-unemployment caused by Covid-19 must be protected from the risk of losing their homes. If the temporary protective measures are suddenly lifted, there are immediate risks for renters, who may have fallen into rent arrears or whose landlords have been waiting to sell up, and for those availing of temporary mortgage payment breaks.
Any relaxation of emergency protections must be gradual and must be accompanied by appropriate supports, such as an augmented rent supplement scheme, to ensure that we keep people in their homes wherever possible.
The decisions we take now will shape whether housing and homelessness crisis deepens or starts to be addressed.
-Pat Dennigan is Focus Ireland CEO
As of mid-May, most other developed countries have begun to step down the measures taken to suppress their economies in the interest of public health.
Here, the Government’s recent roadmap gave greater clarity to business but it also made clear that our economy would be re-opening at a more conservative pace than almost any of our peers.
For example, by the second week in June, the hospitality industry will be fully open in all other EU countries. Ireland’s hospitality sector will only be fully open at the end of July. Nobody knows whether this will be the right decision in the long run, or whether the virus will make a mockery of other country’s plans. But one thing can be stated with certainty, the length of the lockdown will help determine the scale of the fall in economic activity and the size of the fiscal deficit.
The Government’s most recent forecasts showed that €16bn (70%) of the €23bn deficit planned for 2020 would be linked to the lockdown related hole in tax revenues, rather than changes in tax rates or spending increases. If we plan to have a significantly longer lockdown than most developed countries, then we cannot, at the same time, plan to run a deficit which is at the lower end of that same group of countries.
That is, unless, we plan to do much less to protect households and business from the economic fallout. We can do any two of these three things, but not all three. This is the trilemma which the next government will have the unenviable task of solving.
Our view is that further significant measures will need to be taken over the coming months to protect the balance sheets of households and business.
In our recent ‘Reboot and Reimagine’ campaign, we outlined the need to run a deficit which matches the loss in economic output. We expect GDP to fall by around 11% or €37bn in 2020. Our Government response should be of the same scale as the crisis. On top of the €23bn already committed, a further €15bn in stimulus measures will be necessary in 2020 and 2021.
This should be provided in extended income supports to households, liquidity supports to business, programmes to get people back into jobs, and bringing forward maintenance and investment projects from an extended capital plan. This would leave us in line with other developed countries.
The average deficit across Europe will be above 10% by the end of the year, the UK deficit will be north of 15%, and the US deficit will reach 20%. As the economy recovers, there will need to be a conversation about how we pay for new spending programmes, over the coming years.
This would be best achieved by a European-style social dialogue process, including a new commission on taxation. It must also make best use of new streams of European funding for the Green New Deal and other private funding sources. We must avoid repeating the mistakes of the past by putting in place a binding fiscal target for investment spending.
Our Covid debt in 2020 will be financed at almost no cost to the exchequer thanks to the policy action of the European Central Bank. The key determinant of our interest rates then, as it was after the last crisis, will be our continued potential for growth.
There is far more risk to that growth potential in doing too little to combat the impact of the crisis than in doing too much.
-Gerard Brady is chief economist with Ibec
Small businesses are present in every village, town and city, and contribute enormously in terms of economic activity.
Many of them are now closed, have laid off staff, or are working remotely.
Recently published Revenue statistics show that two-thirds of small businesses
employing less than 10 employees, are now in receipt of the Government Temporary Wage Subsidy Scheme.
We need a plan for small businesses:
The big challenge for small business post-crisis, especially those trading on the domestic market, will be the fragility of the domestic economy and confidence among consumers.
The key to the reboot is investment and resulting growth. However, any growth model must place small business at the heart, as they are the drivers of innovation and a permanent source of prosperity, employment and economic progress. We cannot afford to not support small businesses.
-Sven Spollen-Behrens is director of the Small Firms Association