Recoveries die of old age even without virus threat
Heaven forbid that the £3bn virus package could just be corporate welfare with the collusion of trade unions, writes Colm McCarthy
THE Government’s €3bn package of additional spending in response to the Covid-19 epidemic was surprisingly large. The Italian government is committing €7.5bn on the more advanced outbreak in that country, 2.5 times the Irish figure for a country with 12 times the population.
Some of the measures are inevitable, such as extra money for the HSE, but there has been a missed opportunity to keep something in reserve.
The following statement was released last Wednesday: “Following consultation with trade unions and employer representatives (the Irish Congress of Trade Unions, IBEC, the Construction Industry Federation, Chambers Ireland and ISME) the Government has therefore agreed to introduce a series of measures to enhance State illness payments for people affected by Covid-19.”
As a guiding principle, whenever the ICTU, IBEC and their outriders gather unsupervised in Government Buildings, there is a risk that the unrepresented taxpayers will pick up the tab for whatever recrudescence of social partnership has been hatched, and so it proved last week — the statement went on: “These measures will have a significant cost to the Exchequer but are being taken in recognition of the overriding public health imperative facing the country at this time.”
The first part of the sentence is correct — the measures will indeed have a significant Exchequer cost — but the second part about the “overriding public health imperative” is problematic. Heaven forbid that this could be corporate welfare, with the collusion of the trade unions. Illness benefit related to Covid-19 is to be €305 per week, versus the normal rate for any other illness of €203 per week. Is the Government seriously arguing that the increased rate of payment is a public health measure? Will the virus hear about the increased rate of payment and back off ?
While Minister Paschal Donohoe believes that the €3bn can be accommodated and a zero budget deficit delivered regardless, there is little prospect of this happy outcome.
Parts of the Irish economy are already in freefall and bad news is coming fast. Passenger traffic at Dublin Airport, which had been flatlining for a while, was down by a third last week and further falls are possible. Lufthansa expects to have half its fleet grounded this week and sent four aircraft transatlantic yesterday, versus up to 70 on a normal day.
Some of the provincial airports in Ireland and elsewhere are enjoying a once-off traffic boost — unwanted aircraft need to park up somewhere, so arrivals will be exceeding departures for the next few weeks. Some major airlines could go bust due to the loss of US business alone, unless governments decide to bail them out. The hospitality sector around Europe is collapsing as corporates ban staff travel, and the job losses could be horrendous. In Ireland’s border counties the slide in sterling, down 7pc in a few weeks, will put further pressure on retailers as shoppers head north.
The adverse impact on employment and on public finances will depend on the duration of the health emergency. Governments have been coy about the likely date when things get back to normal, because they simply do not know. But school closures and sporting postponements for a few weeks are misleading.
The diagram shows the intent of policy, to delay the spread and control the peak demand on hospital capacity. This delay policy means that the emergency will last a lot longer than a few weeks or even months. The UK’s chief scientific officer has indicated that the peak will come in 10 to 14 weeks, perhaps around the middle of June. But if the curve of ‘new cases with delay’ is symmetric, as it invariably seems in the charts, there could then be a further 10 to 14 weeks to the all-clear, which would mean that the emergency lasts into September or beyond, as would the economic downturn and the decline in tax revenues.
No firm dates have been offered since the experts are not blessed with the power of prophecy, but the schools will hardly reopen before the summer holidays.
Forward bookings for the tourist season in the Mediterranean hotspots are being pulled, with Italy and Spain particularly exposed. Remember the focus on the Italian ‘bond spread’ during the financial crisis? Well it’s back — it measures the excess yield on Italian 10-year bonds over their German counterparts. In a well-functioning monetary union, it should be close to zero but had blown out to 2.3pc last Friday. Italy has heavy legacy sovereign debt and weak banks.
A lurch into budget deficit in Italy has the potential to reignite the Eurozone debt troubles and Ireland is not out of the woods, since the debt position here is weaker than all but a handful of the common currency members. Should the Italian economy nosedive, the common currency’s viability will be questioned again, and the spotlight will be back on Ireland’s debt sustainability.
In the run-up to last October’s budget, the Government was cautioned by the Fiscal Council, the Central Bank, the ESRI and several external observers, including the IMF and the OECD, to avoid excessive spending commitments and tax giveaways, advice which was ignored.
The risk these advisers perceived was precisely the one that has now materialised, a slowdown which will push the budget into deficit at a time of bond market turbulence.
The Irish recovery is seven years old: recoveries die of old age and the European economy has looked anaemic for some time. Add in Brexit risks and the threat to corporation tax receipts and the case for caution looked persuasive.
None of these predictable concerns has gone away, and along comes a guaranteed international slowdown caused by an unpredictable virus crossover from bats to humans in central China and a worldwide pandemic. The European Central Bank’s package of measures last Thursday disappointed the markets and there will be further pressure if things continue to worsen in Italy.
Ireland has been able to borrow cheaply in recent years for several reasons, including the strong recovery here and improving budget figures. The principal driver has been the willingness of the ECB to buy government bonds, including Irish government bonds, despite German resistance. That willingness will be tested again if things go wrong in Italy and German resistance to an expanded bond-buying programme continues.
The risk for Ireland is that the budget could go sharply into deficit this year as the economy contracts, coinciding with an escalating bond spread in Italy and the re-emergence of a two-tier sovereign bond market in the Eurozone with Ireland re-classified in the wrong division. This is what happened in 2010 and led to the Troika bailout and the effective loss of sovereignty which followed. It would have been wise to restrict the emergency measures below €3bn — there is too much complacency about the indefinite availability of cheap funding as Ireland’s debt mountain is re-financed.
‘The risk for Ireland is that the budget goes into deficit’