Gerard Howlin: Reality will soon shatter the fantasy of an austerity-free recovery

Tax income must be found or promises will have to be broken - our columnist's money is on the latter
Gerard Howlin: Reality will soon shatter the fantasy of an austerity-free recovery

Shoppers, some wearing face masks, walking along Opera Lane in Cork City. Picture: Denis Minihane

Political chatter is fascinated by the mishaps of new ministers recently, all of them, coincidently, from Fianna Fáil. I sense that such carry-on is more interesting to the political class than it is the general public.

What will matter soon is not messy missteps, but the substance of the economic recovery from Covid-19, and the associated political cost. There is a continuing fantasy of an austerity-free recovery.  

Reality, when it arrives, will be rude.

Next week, two important documents will be published. The summer economic statement (SES) sets out the Government’s medium-term economic strategy and updates the parameters ahead of the budget in October.

This year, either together or separately, we will also have the promised July jobs stimulus, intended as an immediate boost to employment, and a way to help keep businesses alive.

The subsequent budget will be accompanied by a new national economic plan. That is the moment when fact will separate from fantasy in the programme for government. Ministers will either walk away with the necessary funds from budget negotiations, or be left holding broken promises as a keepsake.

The gist of the Government’s economic plan — to borrow up to €30bn this year, and more next year — is now months old. It was conceived in the initial phase of the pandemic, at a time when something called a “V-shaped recovery” was still spoken of with conviction. 

This would see the virus fade, a re-opened economy in the autumn, fuelled by pent-up demand, swiftly carrying us into an almost-back-to-normal 2021. By 2022, all would be well.

It won’t.

One interesting nugget in the programme for government reads: “We will set out a medium-term roadmap detailing how Ireland will reduce the deficit and return to a broadly balanced budget.”

Leaving breadcrumbs behind in the forest may be as reliable a guide.

Economies that were opening up are shutting back down. There is no prospect of a V-shaped recovery. The only certainty is a longer, deeper recession than feared.

The purpose of massive borrowing is to reboot the economy. The hope — and it is only hope — is that a recovered economy will close the gap on a dangerously high budget deficit over subsequent years.

But if that recovery is further away, and the debt required to get there is even greater, at what point is the objective of a broadly balanced budget prioritised, and at what cost politically? This will be the ultimate political call for this Government.

There is clearly a good case for the measure, but it is far from clear if what is proposed — let alone more of it — is affordable.

People who lose their jobs won’t benefit, but will instead pay an opportunity cost in what is available for other services they depend on. It strikes me as another example of delusional unreality about the economics of our situation.

The ones who will ultimately pay most are the young — young children, especially. All borrowing is a tax on their future. In this crisis, some of that is unavoidable, but I have no sense of a necessary prioritisation for scarce resources. Maybe that will come next week. Let’s see.

Borrowing, our new economic oxygen, is possible in scale because of rock-bottom interest rates from the ECB. In addition, the NTMA is rolling over older, more expensive debt from the economic crash at cheaper rates, thus saving on servicing costs.

This is all doable in the short term, and money borrowed replaces lost revenue in the economy and, via income supports, puts money in people’s pockets. The gamble is knowing when the tide is going to go back out.

We are now faced with rolling over ever-greater debt indefinitely. At some point, the great quantitative ease will be over, the ECB will recoil, and we will have to fend for ourselves on the international money markets. 

The succour for this is supposed to be the balm of being in the pack, unlike in 2008 when Ireland was an outlier. Ireland next time will not be the antelope on the edge of the herd, we hope.

But in even that benign scenario, the debt we are now undertaking will be an almost permanent drag on the public services children who are growing up now hope to enjoy.

If Covid becomes a pandemic not of two or three years, but of five or more, then nothing as we know it is economically sustainable. There are no models to measure how it would spin out.

But the economic model of our society would be over. Business travel, tourism, and hospitality will be poleaxed.

In the meantime, starting from next week, when the first policy instalment of this Government arrives, the programme for government cannot be paid for using a ballooning deficit. Tax income must be found, or promises must be broken. My money is on the latter.

That is only to speak of money and economics. The politics will be sour. In my long lost youth in the 1980s, when unemployment reached 17%, we simply upped and left en masse. Something similar happened in the last crash. This is different. There is no exit strategy for the young and unemployed.

Socially, since the Famine, emigration drained the young and those most likely to be belligerent away. This time there will be no emigration. Covid is a cordon around the island. That makes for a political pressure cooker with no safety valve.

It is unprecedented. Its outcome is unknowable, but I predict it will be significant.

The Government wilfully raised expectations of what is possible, to grease the wheels of coalition. They will say we should have read the fine print.

I have. Little is specifically set out. But that won’t save them.

A prospect of “one for everyone in the audience” was artfully conjured. But all there is, is an IOU. We can brave this winter for sure, but then what?

Perhaps we will be lucky and a vaccine next year will shake the world back to life in 2022. But anything longer than that catches us in a trap. Those children for whom the parental leave is for will pay for dearly afterwards.

I wouldn’t worry too much about ministerial messing about.

Even if it ends badly, it won’t matter much. What matters more is that we don’t so much have an economic plan as a plan to throw the dice.

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