Daniel McConnell: We have to spend now and recoup the money after crisis
A decade ago, when this country was in the teeth of a vicious recession, then taoiseach, Brian Cowen, came under fierce pressure to introduce a radical stimulus package to prime the flagging economy.
The idea was Keynesian economics in its simplest form: At a time of weak private sector activity and growth, the Government steps in and boosts the system with wads of cash to get things moving again.
Newspapers campaigned heavily on the idea for weeks.
Economists and business leaders demanded action when 200,000 jobs had already been lost, particularly in the construction sector.
Cowen, however, set his face against such a measure.
He doggedly, along with Brian Lenihan, his finance minister, set upon a path of reducing government spending, which stood at about €55bn, and increasing government revenues, which had collapsed to about €35bn.
At a briefing for journalists, I put the matter to Cowen and asked him why he would not consider injecting new life into the wasteland the Irish economy had become.
In a typically cutting and blunt Cowen response, he quipped: “We’re borrowing €18bn just to keep the lights on: there’s your effing stimulus.”
That was that.
The scars of that recession have loomed large over the last decade, or lost decade, which it has been for so many.
After several years of consistent and steady economic growth, buoyed certainly by better-than-expected corporation tax takes, the national coffers had gone into surplus.
Finance Minister Paschal Donohoe eschewed a giveaway budget last October, even though the general election was around the corner.
Despite getting precious little thanks for his efforts, the onset of the coronavirus epidemic, and the speed with which it has sent the Irish and global economies into meltdown, is unprecedented.
The Irish economy has been virtually shut down overnight and the true extent of its impact became a little clearer this week, by way of an ESRI projection that would scare the living daylights even out of the most reserved individuals.
It predicted the Irish economy would fall into recession this year, shrinking by as much as 7.1%.
Up to 350,000 people are expected to lose their jobs, a sixth of the working population.
In its latest quarterly assessment, the think tank said that the Covid-19 pandemic was the greatest threat the Irish economy had faced since the financial crisis.
Assuming the shutdown measures stay in place for 12 weeks and the economy recovers afterwards, the institute said it expects a contraction of 7.1% in 2020.
“Consumption, investment, and net trade would all fall sharply. Households would cut spending, firms would cancel or postpone investment, and external demand for Irish goods and services will fall,” it said.
The labour market will face the largest shock in a single quarter in living memory, with the unemployment rate to soar to 18% in the second quarter of this year, up from 4.8%, which was almost full employment, the ESRI has warned.
To put that in context, the rate of unemployment during the last crisis peaked at 15.1%, in early 2012, before falling steadily.
Donohoe, in the Dáil on Thursday, when it debated, and later approved, its €3.7bn stimulus package, said the Covid-19 crisis was costing the country €300m a week.
But is that €3.7bn enough to cope? In the context of the $1.8tn package announced in the US, it appears paltry.
So, what do we need to do to salvage as much of the country as we can?
Economist Dan O’Brien outlined what is needed and how this crisis compares to the crash of a decade ago.
“This is a much more sudden contraction, and potentially much bigger. On a positive note, the crash of 12 years ago was a deflation of a bubble.
"There was no way all those jobs in construction, for example, could have been saved,” he said.
“The Irish economy goes into this in a much healthier state, and if companies can be preserved and if the Government can flood the economy with borrowed money — and it’s right this time to borrow the money — if you think of it like the deck on a fishing boat, all the fish arrived, they’re all gasping for oxygen.
"The Government needs to flood the deck with money, spend money on health, spend money, as it’s done, on income supports,” he said.
“So people have money and people, in turn, need to spend money as much as they can.
"A lot of this is going to be down to people saying, ‘I’m fearful of spending, I don’t have anywhere to spend, my income is down’.
"We really need to spend, because if we don’t get money into the economy, all those fish are going to start dying.
"So we need to flood the economy with money, and all of us need to spend as much as we can,” O’Brien told RTÉ Prime Time.
He said that if we can get through the current health crisis, there’s a really good chance that the economy can come back very quickly.
“Very much unlike 12 years ago, when it was inevitable that we were going to have a long period of recession, because we had this big bubble that collapsed, now, at least, we have the possibility, if we can get the health thing sorted, we flush the economy with money, get people spending as much as possible, we can get through and bounce back,” O’Brien said.
O’Brien said that because it is very cheap, at present, to borrow money, the Government must borrow a lot of it and get it moving into the economy quickly.
“But what we need to do with health, we need to throw money at more beds, more meds, more medics, more doctors, more nurses, more screening, more testing, absolutely everything to increase capacity.
“That is the only way that we can deal with this and have a hope of controlling it,” O’Brien said.
“So spend. We’re probably losing €5bn a week from the economy, because of this. But this is an emergency.
"The money is very cheap, at the moment: the Government could borrow for almost nothing.
"That won’t continue forever. But now is the time. Borrow big, spend fast,” he said.
Now, given Donohoe’s refusal to play fast and loose with the public finances at budget time, the Government’s interim status, and the ruling-out of an emergency budget, it would appear that such a sharp and decisive cash injection is not in the offing.
Taoiseach Leo Varadkar has already hinted at a major borrowing plan and has cited some European-wide bond programme. But why wait?
We have an excellent credit rating again, money is cheap, and would cost little or nothing to pay back.
I am slow to criticise the incredible national effort of the past number of weeks, but the absence of a fully functioning government (highlighted by the fact that no more emergency legislation can get passed, due to the Seanad configuration) is now a major issue.
The pace of events, even in the past two weeks alone, has shown how nimble the Government has had to be and if thousands of businesses are to be saved and hundreds of thousands of jobs are to be restored, drastic action is required.
Any money spent now will be recouped many times over once the crisis has passed.
Borrow big, spend fast.
Let’s get on with it.
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