The Covid reckoning is looming and world leaders have to face it
It could take a decade before the fog clears and we know who pressed the right fiscal buttons, writes Colm McCarthy
SIX months into the Covid crisis, governments are having to acknowledge that there will be a reckoning — the public inquiry just announced in the United Kingdom or an unavoidable date with the voters for Donald Trump in November.
In both countries the verdict is likely to be negative. The UK and the USA have not had a good crisis and most other developed countries seem to have handled the public health emergency better.
In Ireland, there is no basis for self-congratulation — the figures show that some comparable countries have kept infection and fatality rates lower, and there have been clear weaknesses in the policy response. The public health professionals will have their say in due course and there is blame to be allocated.
Why did it take so long to get testing capacity mobilised, why were healthcare workers under-equipped with protective gear, what really went on in the care homes, and why was the messaging so vague on face masks and foreign travel? It is too early to judge but the Irish authorities will not get to grade their own homework.
The same will happen with the economic policy response. It could take a decade before the fog clears and it becomes possible to draw conclusions about who pressed the right buttons.
Most European countries have expanded their fiscal deficits deliberately, the textbook response in the short term. But the reconstruction of an open trading economy for the post-Covid world is a challenge also for supply-side management. It will not be possible to protect every firm and every job — there will be a different economy five or 10 years out and there will be more losers than winners. The political temptation is to reassure, to deny that there will be any losers, to pretend that all can be compensated and that every soft option can be afforded.
The fuss last week over the tapering of the Pandemic Unemployment Payment (PUP) needs to be seen in this context. It was never the case that Ireland’s capacity to support those out of work had somehow been enhanced because Covid came calling. Quite the reverse — the Irish economy for the foreseeable future has a reduced capacity to finance public spending, as against the capacity it appeared to have 12 months ago.
The demands on the public purse have increased dramatically, the purse is diminished unless you believe that Covid is a lucky break, and the emergency supports for the economy are temporary. They must, in Ireland as everywhere else, be withdrawn gradually unless you believe that permanent deficit finance on a large scale is feasible as well as popular. The enthusiasm for soft options in the political class, reflected uncritically in parts of the mainstream media, is irresponsible and will be so perceived a few months from now.
The Government will unveil a medium-term economic plan in October, alongside the budget for 2021. The briefing documents for incoming ministers released last week provide an early preview of what lies in store. The officials drew attention to the inevitable phase-out of the emergency public spending programmes — this kind of follows from the nature of an emergency. October’s National Economic Plan is already taking shape in some civil servant’s laptop and it is not too difficult to guess what it will contain.
The budget deficit for 2020 will be somewhere around €25bn or €30bn. For 2021, it will, even if things go well, be lower but substantial. A year or two later, it will need to be zero or small, because no eurozone country will be able to sell government debt in sufficient quantities to deliver indefinitely on all the soft options. A rough guess is that the target deficit for, say, 2023, will be €20bn lower than the out-turn expected in 2020.
How do you reduce the deficit over a few years by such a large figure? History is always a decent guide and last time round it was done through modest reductions in current spending, large reductions in capital spending and serious increases in taxes. Whatever deficit reduction target is specified, it will be denounced by the political opposition and by the soft-option media, who will pretend that a better way is somehow feasible. October should be fun.
Every government in the developed world has had to deal in real time with the public health emergency, and the economic fall-out and some clear patterns have already emerged. Thankfully there has been a universal willingness to let public deficits rise and to augment them with discretionary extra spending, tax cuts and payment deferrals. The composition of these measures has varied, and mistakes get made.
In Ireland, the fiscal correction from 2008 onwards relied too heavily on cuts in the State capital programme and the new Government has committed to its protection on this occasion. There is a corollary as a matter of arithmetic. Unless implausible assumptions are made about the speed of recovery, there must be tax increases, tight controls on current spending, or both.
The Government has ruled out increases in taxes on income, has cut the standard 23pc VAT rate and announced, to acclamation, an across-the-board pay increase for public servants. The logical implication is that the capital programme will get gutted again.
The strongest temptation, to which several governments have succumbed, is the preservation of firms rather than the recovery of employment. There is no reason to expect that the economy of the future will be the revived economy of 2019, defrosted with a swift dose of demand stimulus. Economists in the USA and Europe have been busy with empirical research on the nature of the downturn and some tentative conclusions are available. The most important is that this downturn will have permanent effects and the preservation of firms in twilight industries will come at the cost of sustainable job creation elsewhere.
It is not easy to perceive which firms are in the nohope category or where the jobs of the future are most likely to emerge.
The programme for government entrusts this task to the Taoiseach’s department and their conclusions will inform the October economic plan. It is already clear, for example, that the aviation sector is likely to be smaller over the longer term, and that person-to-person sectors like hospitality will need new business models.
Ireland has a track record of economic flexibility and that means that some industries and firms will need to contract.
The emerging alliance of employer groups and trade unions, in defence of the 2019 economy, will need to be confronted later this year, in the interests of economic recovery.
‘Authorities will not grade their own homework’