No need to don financial hair shirt this time

WITH the Taoiseach talking up the need for cuts to Covid payments, a weary public could be forgiven for assuming another bout of austerity was on the way. After all, with the billions of euro in spending that will be needed to help us survive the State’s biggest ever economic crash, our debts – still €200bn and counting – are heading back close to their crisis-era peaks at a level equal to 160pc of the size of the economy’s output.

That level would have triggered a market meltdown 10 years ago, although now it barely merits a shrug.

So it might have come as a bit of a surprise that the Irish Fiscal Advisory Council (IFAC), which was set up to ensure the Government didn’t return to its wicked ways with the budget, has not only urged more spending but said there was no need for a return to the hairshirt austerity of the previous era.

A lot has changed since the financial crisis hit, after which it took 11 long years for economic growth to push unemployment back down its 2008 level of 5pc.

Although the Covid shock will be more intense than that felt in any year of the crisis, we were in good shape when the pandemic hit. The recovery will be much faster as, back in 2008, the economy was overheating and there were huge credit and bubbles.

Even if you accept that severe budget cuts were the order of the day during the last crisis, this time the biggest risk is that Leo Varadkar and Paschal Donohoe will turn off the spending taps too quickly and damage the recovery which should start to emerge once the lockdowns are eased.

In the past, austerity was sold as the only way to halt sharp rises in borrowing costs, which would cause yet more damage to the economy.

While the pandemic spending will indeed cause a sharp one-off rise in debt levels, interest rates are at record lows and as Sebastian Barnes, who heads the IFAC, noted 10-year bond yields for Ireland are negative.

Those negative rates mean there is scope to run modest primary budget deficit still seeing debt as a share of gross domestic decline, so it makes economic sense to borrow more and financial markets are, in any case, much more tolerant of high levels of debt.

The final argument against a return to austerity was that it imposed huge costs on the most vulnerable in society and may have done more damage than good in many countries, causing a bigger shock and a slower impact on the budget deficit than had been expected.

IFAC said in its report that even without austerity it could be three years before the economy is back at the output levels seen last year. That said, IFAC would be a pretty toothless watchdog if it let the Government off the hook on the budget.

The council urged it to keep up spending for housing, the Green New Deal and Sláintecare but, to do so, it will have to make choices elsewhere.

It would seem wiser to increase taxes on the rich as the pandemic has hit the poorest hard, and to raise health spending and protect the less well off, although that is a decision the IFAC leaves to the Government of the day.