Coronacrisis

Over 900,000 workers benefited from the PUP and EWSS income supports in April. For how much longer can the state largesse continue, wonders Chris Sparks

The Employment Wage Subsidy Scheme is supposed to terminate at the end of June. Weaning companies off it won’t be easy

The national Level 5 lockdown instituted by government at the end of December 2020 has succeeded in suppressing the Covid virus, at least as far as hospitalisations are concerned. The cost of the failure of the hospital system to cope with the disease without lockdown has been enormous, and that cost will continue so long as government prohibits businesses from trading.

Covid income supports have two elements: the Pandemic Unemployment Payment (PUP) and the Employment Wage Subsidy Scheme. In mid-April, c.910,000 workers - two-fifths of the labour force - were receiving one of these supports. The Department of Finance’s recent Stability Programme Update noted that sectors where transactions between producers and consumers require face-to-face contact have been most adversely affected.

Extrapolating from PUP data, Accommodation and Food Services has been the sector most impacted by the pandemic, with three out of four employees availing of the PUP at the peak in May 2020, down to c.60% in April 2021.

In the Construction sector, over half of workers were in receipt of a PUP payment at the peak. That figure fell to c.40% at the start of April, and is set to decline further after some restrictions were eased on April 12. Other sectors significantly impacted by the pandemic include the Administrative and Support Services sector and Wholesale and Retail.

More than one year after the first lockdown, the Covid-adjusted measure of unemployment is currently around 24%. For hundreds of thousands of people, Living with Covid has meant Living on Welfare. For large cohorts of PUP recipients, however, free money for doing nothing is something you can get used to, and winding down the supports will be politically challenging for ministers.

The PUP scheme and the EWSS were scheduled to terminate at the end of March 2021, before being extended to the end of June due to the ongoing Level 5 lockdown. When unveiling the SPU on April 14, minister Michael McGrath commented that the government will honour its commitment that there be no cliff-edge end to supports at the end of June. “We are conscious that continued support will be required to assist sectors of the economy on the path to recovery, and we will set out these plans in the coming weeks,” the minister added.

In March, the Department of Finance was more hesitant. In an analysis document, DoF officials raised questions around the sustainability of EWSS costs into the future. “There remains a notable and increasing risk of many firms becoming overly dependent on state supports that overly extend their period of economic viability, with potentially high levels of deadweight,” the officials stated.

“However, this should be balanced against the costs and impacts of immediately removing the EWSS at a set date, in terms of impact on employment and costs associated with income supports, as well as future labour market reactivation measures.”

Maintaining the state drip is being encouraged by the European Commission. In a recent communication to member states, the Commission warned against a premature withdrawal of fiscal supports, stating that they should be maintained this year and next year too if necessary. “Fiscal measures should gradually pivot to more targeted and forward-looking measures that promote a resilient and sustainable recovery,” is the view from Brussels.

Under EU rules, member states are supposed to stick to strict budgetary parameters. These were waived last year and the Commission has signalled that they won’t apply again until 2023. To encourage spending, the Commission is overseeing disbursement of €310bn in grants and up to €360bn in loans from the Recovery and Resilience Facility.

This funding is being made possible by the institution of the European Union borrowing on capital markets, just like its feckless constituent parts. “The RRF will play a crucial role in helping Europe recover from the economic and social impact of the pandemic, and will help to make the EU’s economies and societies more resilient and secure the green and digital transitions,” is the stated rationale. “To cushion this impact and to promote a

resilient and sustainable recovery, our clear message is that fiscal support should continue as long as needed.”

This benign macro backdrop explains why Taoiseach Micheál Martin has been in no rush to exit Level 5 lockdown. Government is budgeting for an Exchequer deficit of €17bn for 2021, after state outlays exceeded income by €12bn in 2020, the largest deficit since 2012. However, DoF officials are conscious that extended lockdowns can result in long-term scarring effects.

Department economists Luke Rehill and Éamonn Sweeney speculate that “the disruption to education, as well as skill accumulation through worker-toworker learning, may have an effect that reduces human capital accumulation. The literature shows that an individual’s re-employment probability declines rapidly with every additional quarter of unemployment.”

More than a year into the pandemic, it’s notable that there has been no spike in insolvencies, thanks to the government supports, loan payment breaks, and creditor forbearance. Rehill and Sweeney say the challenge will be the timing of when to remove EWSS supports, with thousands of viable firms estimated to be at high risk of becoming insolvent in the absence of subsidies.

The Temporary Wage Subsidy Scheme (TWSS), which ran from March 26 to September 1 last year, subsidised the pay of c.650,000 workers employed by c.70,000 firms at a cost of €2.7bn. The replacement Employment Wage Subsidy Scheme (EWSS) has benefited c.550,000 workers employed by c.50,000 employers at a cost of €2.3bn. After the latest lockdown started, 36,500 employers were availing of the EWSS through January for the benefit of 350,000 staff.

The EWSS and PUP schemes complement each other, insofar as individuals employed in restaurants and bars, for example, move off PUP and into EWSS when their employer is permitted to trade, and back to the PUP again when their workplace is shut down.

Nearly 31,000 workers moved from the PUP to the EWSS between August and September 2020, a trend that reversed with new lockdowns in October, with 120,000 moving from EWSS to PUP. In January 2021, 140,000 EWSS-supported employees migrated to the PUP, and an additional 140,000 non-EWSS employees appeared in PUP in January too.

The average monthly cost of EWSS is c. €440m, with 85% of the cost in subsidy payments and 15% in foregone employers’ PRSI. By the end of April, the EWSS cost will total c.€3.5bn, helping Ireland’s national debt to its projected total of €239,000,000,000 by end 2021.