Government under little pressure to hike taxes to pay Covid bills, says Coffey            

Any hiking of taxes would require a return to pre-Covid lows in unemployment levels, which could take until the end of next year, said economist Seamus Coffey. 

UCC economist Seamus Coffey

It will be some time before governments across the eurozone will be under pressure to hike taxes to pay for the huge debt incurred in fighting the Covid-19 health and economic crises, leading economist Seamus Coffey has said. 

The former head of the Irish Fiscal Advisory Council said that eurozone economies will need to return to pre-Covid levels of activity and employment before governments could contemplate hiking taxes.            

The UCD economist said a return to normal activity for the entire eurozone implies an unemployment rate of 9%, which, for Ireland, means a return to an unemployment rate of around 5% — the jobless level in February last year, on the eve of the onset of the crisis. Returning to such pre-Covid unemployment levels could take until the end of next year, Mr Coffey said.          

He said the ECB has held up its part of the bargain in keeping sovereign interest rates low, because otherwise the Covid economic crisis would quickly turn into a sovereign debt crisis. 

There have been growing concerns that taxes will rise to pay for the Covid bills, with a survey by PwC of Irish business leaders showing that many expect some sort of tax rises to affect their businesses.       

However, the National Treasury Management Agency today continued to tap sovereign debt markets to finance the growing Government debts, at close to zero costs. 

The timing of the auction came just before the ECB afternoon meeting in which president Christine Lagarde effectively recommitted to keep eurozone sovereign interest rates at rock bottom levels. Sovereign interest rates fell back immediately on the news.                                  

The Government agency raised around €1bn in debt from a 10-year bond at around 0.013%, higher than the negative interest rates of recent auctions, but still implying the Government can finance its Covid debts at no cost.                                

The Government's budget deficits over two years — last year and in 2021 — will amount to a total of around €36bn, but it is benefiting from a huge programme by the ECB in which the central bank buys large amounts of Irish and other eurozone government bonds and corporate bonds on secondary markets, to keep interest rates low.

Ms Lagarde announced measures that will keep eurozone rates in check despite the recent rise in US interest rates, fuelled by the American success in rolling out vaccines.               

The ECB pledged to ramp up buying government debt in the coming months in a bid to contain rising bond yields and will likely step up its programme of bond purchases in the next quarter.

The ECB action means "it will, at a minimum, resist further upward pressure on bond yields", said Capital Economics in London. 

The announcement has already had a notable impact on bond yields.

"The 10-year Italian sovereign bond yield has fallen from 0.66% before the meeting to 0.60% at the time of writing. 

"The euro has been more volatile, but is now little changed from before the meeting," it said.