Economy needs a shot in the arm to help combat the coronavirus
Timely and effective State intervention is vital in times of crisis — and we may be entering such a period right now, writes Dan O’Brien
IRELAND and the rest of the world face a period of unusual uncertainty. Although recent news from China, the epicentre of the coronavirus outbreak, gives some cause to believe the health impact and its economic side-effects can eventually be contained, it is likely that things will get worse before they get better in most countries.
Just how serious it could get from a health perspective is the most uncertain aspect of the outbreak. If deaths in Ireland match those in China thus far, around a dozen people would lose their lives over the next three months (the crude death rate from the disease in China stands at around one in 400,000 of the population).
If, however, the figures from China are inaccurate, or if the disease spreads more widely, it is feasible that fatalities could run into the thousands in a worst-case scenario.
Politicians and public servants here and the world over face serious choices. The central conundrum is a trade-off: slowing the spread of coronavirus will also damage a country’s economy, and hence its capacity to deal with the virus and its consequences.
Trade-off decisions — such as cancelling St Patrick’s Day festivals across the country — will be made by balancing the benefits against the costs. Those with medical expertise will be central in making those choices.
Non-medical issues arise around an entirely separate set of choices relating to stimulating the economy if it turns down as a result of the outbreak. Unfortunately, in Ireland’s case there is not much in the fiscal tank.
Thankfully, last October’s budget was more prudent than usual as it was based on a no-deal Brexit taking place at the beginning of this year. That means there is scope for policy measures, and in a situation such as the one we now find ourselves, the case for radical action is strong.
The State is by far the largest actor in any economy. The goods and services it purchases and the money it redistributes via the welfare system influence the activity in all developed economies to a considerable degree. At times like this, a well-organised State is invaluable in reducing uncertainty and providing security. There are many policy options. Here are three.
Incomes and security
The value of a European-style social welfare system is never more evident than in times of uncertainty and shock. Illness benefit is among the oldest types of welfare payment. It is vital in helping people at what is often their lowest ebb.
It has not, however, usually been a means of boosting demand in any economy. That is because mass outbreaks of illness are very rare. What the world is facing with coronavirus has already moved into unprecedented territory. There is a case not only for easing access to illness benefit, but for increasing payments too, as a means of lessening a potential severe reduction in consumer spending in the economy.
An aspect of the welfare system that has received less attention is jobless benefit. In some countries, unemployment insurance pays those who lose their job a high percentage of their previous income for a period of time after they become unemployed (payments then taper, in part to provide added incentive not to delay searching for a new job). This ensures that being laid off is a less traumatic event, at least in terms of household income. From an economy perspective it also means aggregate consumer income does not fall by much in a recession.
Ireland should have moved away from its flat, open-ended jobless benefits to such a system a long time ago. Now might be an opportune time to move in that direction.
If we all understood that we would get higher benefits in the months after we are laid off, we would be less inclined to increase our precautionary savings, thereby depressing spending further.
Business supports
Cash flow will become a serious issue for some companies within days if business falls off dramatically. In the hospitality sector there are anecdotal signs that this is already happening. A drying up of revenues could tip weaker businesses over the edge, as happened with the airline Flybe just last Thursday. Even for otherwise healthy businesses, a sharp fall in turnover in a short space of time makes paying staff and suppliers more difficult. Banks may not be willing to extend overdrafts if the outlook deteriorates further.
Over the next two weeks, companies and the self-employed will file their Value Added Tax returns for January and February. These payments are usually substantial. For the Government to offer companies and individuals the option of delaying VAT payments until later in the year could give businesses the breathing space they need to get through a difficult period. (A low rate of interest on deferred payments would be advisable in order to disincentivise companies who don’t have cash flow problems from taking advantage of it.)
Mortgage rules
One of most important lessons learnt from the property crash was that over-borrowing has multiple negative consequences for individuals, society and the economy. Central Bank rules to limit over-borrowing have been successful in saving people and banks from making bad decisions.
The stabilisation of house prices across the country over the past year, at levels one-fifth below peaks in 2007-8, show that the rules have proved their effectiveness.
However, if the economy undergoes a serious contraction, consideration could be given to loosening the rules for a short period, say six months. That would keep an important market moving and infuse credit into the economy at a time when bank lending is likely to contract to other sectors.
Stimulus measures such as these would help soften any economic downturn. They could even tip the economy back towards growth as the initial shock effect wanes and things return to normal, or people accept a new normal and get on with their lives.
But if any recession were to be deeper and more protracted, the Government could start running out of road. If tax revenues fall because the economy seizes up, and if the State’s outlays rise — to pay for emergency health measures and higher welfare payments — then their budgetary positions will move rapidly into deficit. Mercifully, that point is a long way off even in a worst-case scenario. Over the past week, attention has rightly and understandably been focused on the human health implications of the coronavirus outbreak. A lot of good news on the economy has, equally understandably, been the focus of less attention.
Two of the most timely indicators of activity were published last week — monthly tax revenues and the jobless claimant count.
In January and February, the amounts of cash flowing into the State’s coffers accelerated on the rates recorded in 2019. Year-onyear revenue growth was well into double digits, not far off twice the rate recorded over all of last year.
The numbers signing on the live register for unemployment benefit fell yet again in February. At just over 180,000 people in receipt of this benefit, the numbers have not been lower since January 2008.
Other important, if less timely, economic indicators were also published last week. The widest measures of economic activity are GDP, GNP and GNI. Though they are notoriously volatile, these figures and their component parts showed lots of momentum throughout 2019.
The extent of the momentum in the Irish economy up to the end of February does not mean it is immune from a virus-related recession, but it is about the best position we could be in heading into what may be difficult times ahead.