More billions in spending may be needed to see out Covid-19 jobs crisis   

Michael Mc Grath, Minister for Public Expenditure and Reform and Paschal Donohoe, Minister for Finance putting the finishing touches to budget 2021 at department offices in Dublin. File picture: Moya Nolan

It has taken some time to get there but spending on this scale to save the economy from mass unemployment is the right thing to do.

The Government is sanctioning expenditure to fight the second wave of the pandemic, shoring up the health budget, and marshalling the resources that will be required to help save businesses and a huge number of jobs next year.

Whether the Government can keep its nerve to spend even more if the pandemic takes a further vicious turn will only be known in time. The deficit numbers tell part of the story.

Finance Minister Paschal Donohoe and Expenditure Minister Michael McGrath pledged additional spending that will bring this year’s deficit to €21.5bn, little changed from the amount advertised before Tuesday’s budget measures. 

However, for 2021, the latest plan, as outlined on Tuesday, is to run another huge deficit of €20.5bn. Any Level 5 lockdown will require every bit put aside in the contingency funds for 2021.                    

A consensus has emerged that spending to save businesses and jobs is the right thing to do. 

There was little disagreement to be found in the pre-budget assessments by the Economic and Social Research Institute, the Central Bank, or the Irish Fiscal Advisory Council that spending on health measures and business supports, at this stage, is the right thing to do to avert mass unemployment.

However, there are testing times ahead. No one knows how severe the second wave will become or whether Tuesday's measures will be enough. 

A second wave of the pandemic may lead to further lockdowns, quickly exhausting next year's €2.1bn Covid-19 contingency fund and the €3.4bn recovery fund. 

The “lives versus livelihoods”, as the debate about the economic effects of the health restrictions has become known, is far from settled. 

And any prolonged lockdown will likely topple more businesses and shred thousands of jobs, on a permanent basis. Minister Donohoe on Tuesday forecast total job losses of 320,000 this year and an unemployment rate of 12.25% in the current quarter. Unemployment is expected to remain at an elevated level at an average of 10.25% in 2021.        

Tuesday’s budget is the third in the series of stimulus measures since the onset of the crisis. The Government got top marks in March for rolling out the Pandemic Unemployment Payment (PUP) and the first version of the wage-support scheme, as large parts of the economy were shut down. From the start, the numbers caught up in the crisis were frightening. 

In late spring, the number of people requiring some sort of welfare payment including the PUP and wage-support scheme, raced close to 1.2m.

There were also missteps. The cutting of the levels of PUP struck an odd note and came far too soon. The numbers availing of the PUP scheme rose last week reflecting the stress of exposed businesses to the new health restrictions.

The wage-support scheme was refashioned as the Employment Wage Subsidy Scheme and supports many hundreds of thousands of people. It will now run in one form or another through 2021.    

There was also at least one miss-firing measure in the summer stimulus package. The Government unveiled a supposedly cheap loans scheme, backed by State guarantees, even though business groups and private economists had warned few SMEs could contemplate taking on more debt in the middle of a recession. That was not fixed on Tuesday.     

Early on in the crisis, the Government got a break when the exchequer returns of tax revenues held up remarkably well. 

With many retailers and hospitality bars and restaurants shut, Vat revenues predictably went on the slide. However, income tax revenues held their ground, and corporation tax revenues, not for the first time, unexpectedly boomed. 

Overall, tax revenues have been resilient, even as expenditure on the pandemic and the wage-supports, and health ratcheted higher.

Government ministers and officials could not hide their relief when the tax revenues flowed in, although relying on the multinationals to deliver a further bounty next year will be no sure thing.

Squeezed businesses on the brink of going under have played their part in helping the Government to keep its nerve.

Above all, the rock-bottom finance costs of servicing the billions in new long term debt the Government has raised this year has helped enormously.

Last week, the Government raised €1.5bn selling three bonds at interest rates which set new records for the cheapest debt ever in the State’s history. Two of the three bonds were sold at negative interest rates, which means the State will effectively pay back less than the amount borrowed. 

Actions by the ECB and the EU institutions to not repeat the mistakes of the sovereign debt crisis 10 years ago is bolstering confidence that European countries will be able to finance the fallout from Covid-19’s economic crisis, in the next few years at least. 

By last week, the National Treasury Management Agency had raised €22.75bn in long term debt, at an average positive yield or interest rate of just 0.2%.

However, the crisis is taking another phase. It is hard to forget the terror small businesses faced last March as they faced into the unknown. 

Numerous business owners struggled to meet their Vat, commercial rates, bin collection, and a myriad of other business bills as the Covid-19 health crisis crashed over the economy. Many business groups welcomed the additional measures announced in Tuesday's budget.      

Yet, hundreds of thousands of people have found themselves relying on the PUP, or the wage-support scheme, or have already lost their jobs. 

Fears of a tough Level 5 lockdown in recent weeks were a reminder of the desperation facing many businesses. Other huge problems lie ahead. 

The legacy of unemployment of the economic crisis 10 years ago led to emigration and caused a slump in house building, sowing the seeding of a further crisis. Unemployment also led to an enduring debt crisis for many households who could not meet their mortgage payments. 

The Government must not lose its nerve if the second wave of the disease inflicts even more harm on businesses next year.