Economists: 'Borrow aggressively' to keep domestic businesses alive 

Economists: 'Borrow aggressively' to keep domestic businesses alive 
Economists feel that the July stimulus package will fall short, if the government do not include a credit-guarantee scheme for smaller businesses, and a Vat cut for the tourism and hospitality sectors. Photo:iStock

The stimulus package is in danger of falling short if the Government fails to fashion a credit-guarantee scheme for small firms and doesn't cut the Vat rate for tourism and hospitality, a senior economist has said.

Jim Power said the rising debt burden shouldn’t stop the Government from funding a substantial stimulus package because many Irish-owned firms and swathes of jobs-rich economy companies won’t be able to survive the summer without additional supports.

“I do not believe the debt burden should impede the stimulus package that is required over the next few months,” Mr Power said.

“We have just to borrow aggressively over the next number of years to keep our economy alive,” he said.

Mr Power said he will be looking for details in the stimulus package for how long the waiver on commercial rates will last, the extension of the pandemic supports, and for the amount set aside to help businesses with restart grants.

A Vat rate cut for tourism and hospitality ought to feature “prominently”, Mr Power added, and he will be disappointed if the Government doesn't follow the UK in this regard. 

The remarks come as new figures from the CSO show that the Government before the Covid-19 crisis was carrying a significant level of debt when the distorting effects of the multinationals on measures od economic activity are taken into account.

The debt burden in 2019 as measured by GDP was running at only 56.6% of the annual worth of the economy but was at 94.3% as a share of modified GNI, the measure that more accurately reflects the size of the economy as experienced by households.

The CSO figures showed that GDP rose 5.6% to €356bn in 2019 but was worth less than €214bn under the modified measure. 

By sector, the CSO figures showed that information and communications which is dominated by the multinationals expanded strongly again last year and suggested that foreign-owned firms continued to bring in large amounts of intellectual property.

Mr Power said the CSO figures showed the two-speed nature of the Irish economy in recent months as exports of pharmaceuticals and chemicals accounted for a huge slice of all Irish exports.

Austin Hughes, chief economist at KBC Bank Ireland, said the hit to Irish GDP will probably be less than once feared during the Covid-19 crisis but that the fallout for jobs will be significant nonetheless. For that reason, the stimulus package is “badly needed”, he said. 

Mr Hughes said the Government appears to be set to announce stimulus measures worth up to 2.5% of GDP.

“Given the scale of stimulus measures being enacted in other countries traditionally regarded as fiscally conservative, this seems far from ambitious and looks to be towards the very minimum level required to meaningfully alter the path of GDP and jobs into 2021,” he said.

“The significant amount of economic slack resulting from the Covid-19 hit to activity means that the return on carefully constructed measures could be notably greater than would traditionally be the case of expansionary fiscal policy,” Mr Hughes said.

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