Daniel McConnell: Why next year will be even more painful than 2020 

In light of the horrendous year the people of this country and beyond have endured, news of vaccines is most welcome. But 2021 will pose its own set of problems, writes Daniel McConnell

The Government is hoping to get a bounce from the reopening of the economy and a fast rollout of the various vaccines. Picture Dan Linehan

Quite rightly, the national conversation over the past 10 days or so has been dominated about the emergence of several vaccines and their potential rollout as well as the welcome emergence out of Level 5 restrictions.

In light of the horrendous year the people of this country and beyond have endured, such news is most welcome.

While the road ahead is far from certain, what is clear is that we are at the beginning of the end of this most unnatural interruption to our daily lives.

Because of the virus, Government policy shut businesses down overnight, some of which remain closed today, some would say unfairly.

The nine months of restrictions on our liberties have come at a huge cost, financially, economically and socially but an extraordinary series of supports and government interventions have sought to buffer us as a country against the worst of the effects of the Covid-19 pandemic.

A confluence of events, including record low-interest rates, steadfast lending by the European Central Bank (ECB), and a loosening of usual spending rules have allowed the Government step in and save thousands of businesses and hundreds of thousands of jobs from being lost.

We were told that austerity was not the policy of choice and a Keynesian-style approach of stimulating the economy was being followed.

The projected budget surplus forecast in January has swung to a deep deficit of €25bn, in order to sustain the economy.

The Pandemic Unemployment Payment and the various wage subsidy schemes have been instrumental in ensuring the remarkable sense of social cohesion which has existed here since March.

However, amid all the good news and discussion around vaccine rollout and businesses preparing to re-open, two sobering warnings were sounded but which got drowned out.

Firstly, the Irish Fiscal Advisory Council (Ifac) raised concerns about the scale of spending outlined in Budget 2021. It said the Government has not explained how it will finance up to €8.5bn in increased permanent spending announced in the recent budget that will remain long after the current pandemic.

In its report assessing the Government’s Budget 2021 plan, Ifac said the extra spending increases will make it more difficult to bring the debt ratio back down at a steady pace in the post-Covid recovery period.

Ifac also raised transparency concerns about almost €3bn in spending increases for 2021 in non-exchequer areas such as local councils.

"The increase in permanent spending is surprisingly large," the report stated.

"There is limited transparency on a large portion of it, and there is little indication as to how new measures will be financed sustainably over the medium term."

Minister for Finance, Paschal Donohoe. Picture: Sasko Lazarov / RollingNews.ie

As my colleague Alan Healy reported in the Irish Examiner, chairperson of the Fiscal Council, Sebastian Barnes, said the increased spending creates a "bit of a hole in the public finances at a time where we don't know, exactly where revenue is going to be, but likely on a lower path than we were before".

"Having these big increases in spending is potentially a risky strategy. The increases are very large, amongst the largest increases in net policy spending in recent years. Very much on a par with the very big increase in 2018," he said.

Then came the dire warning from Public Expenditure Minister Michael McGrath that tax increases are on the cards next year, as the bill for dealing with Covid-19 will need to be met.

Mr McGrath has said some adjustments to taxes will be needed.

While Mr McGrath admitted that the public will see some increases to tax in the coming years, he said the measures would be nowhere near as drastic as were seen during the economic crash.

"You can't rule out some tax increases under different headings, but we are determined, first of all to bring about the recovery of the economy," he said.

Mr McGrath said he still stands over the programme for Government, which laid out increases in spending, but he added that when it comes to each individual budget, he will "assess the circumstances".

"We will assess the circumstances at each point in time, but there are a range of tax heads and a range of possible revenue-raising measures. But even the Fiscal Advisory Council, themselves, acknowledge that we will almost certainly be able to avoid the type of austerity that we've seen in the last decade, because it is our assessment and I think it is shared by them, that the bulk of the heavy lifting here can be done by economic recovery. And that's why we are making the right decision," he told Newstalk Breakfast.

Mr McGrath and Finance Minister Paschal Donohoe will publish their multi-annual budgetary projections in April, which he said will "demonstrate the pathway back to a broadly balanced budget".

He acknowledged that Ifac was critical of extra expenditure laid out in Budget 2021, but went on to defend the increases.

About two-thirds of it actually is accounted for by the increase in capital investment and the increase in investment in our public health service.

Minister for Public Expenditure and Reform Michael McGrath said earlier this week that tax increases are likely. Picture: Stephen Collins/Collins Photos

"I would strongly defend the increase in capital investment, this is the right time to invest, we're able to borrow at historically low-interest rates, essentially close to zero. And we are going to get things done that need to be done in this country," he said.

While we know carbon taxes are going to continue to be increased between now and 2030, the big question is whether McGrath is likely to target income tax increases.

The other method of closing the deficit is cutting public spending and the political reality is that for government, the taking back of any payment extended to people is extraordinarily difficult.

For example, the PUP was due to only last for 12 weeks, but it is still there and has been extended until the New Year.

Several more experienced Fianna Fáil TDs have reminded me of the time in 2008 when then Finance Minister Brian Lenihan removed the automatic entitlement to a medical card for the over 70s and the visceral reaction the party received as a result.

That move alone cost Fianna Fáil about 15 points in the opinion polls, support that never returned.

Since taking office, McGrath has overseen two budgets in effect (the July Stimulus and Budget 2021) but as he would admit himself giving money out is far easier than cutting spending.

With his party’s poll ratings languishing at just 12%, McGrath and his Taoiseach Micheál Martin will be hoping to get some sort of a bounce from the economy re-opening and from a fast rollout of the various vaccines.

But, low poll ratings make TDs jittery as they fear losing their seat, so the appetite to withdraw such expensive supports may not exist, even if the economic case for their continuance has faded.

Often doing what is right is politically toxic and there are doubts whether this shaky three-way government has the stomach to increase taxes and introduce cuts to spending.

Such battles as to where the axe will fall tend to be very divisive and can be an impediment to prudent and good decision making.

For all of the pain we saw this year, the truth is that next year is likely to be much worse.