Flattening the disease curve means steepening the unemployment curve

In 2008, the State’s financial position was zapped in an instant. Tax revenues, which were tied to property-related activity, vanished in a puff of smoke leaving a hole in the then government’s finances while the infamous bank guarantee stopped us from borrowing to make up the shortfall. Unemployment, however, snaked up more gradually, peaking at 16 per cent in 2012, four years on from the initial meltdown.

This time, we’re getting the reverse: a rapid spike in unemployment alongside a more gradual financial reversal. Unemployment is expected to hit a record 22 per cent either this month or next, up from 4.8 per cent in the first quarter.

Unprecedented, doesn’t capture it. Even during the world wars, the State’s jobless rate didn’t rise this fast or this high.

Flattening the coronavirus curve has meant steepening the unemployment curve. It’s an ugly trade-off with governments the world over torn between ploughing on with lockdown or lifting restrictions, perhaps prematurely, to limit the economic damage.

German court seeks justification for ECB bond-buying scheme

---

Coronavirus forecast to punch €14bn hole in Government’s tax base

---

Can my business avail of the €2bn pandemic fund?

---

Danny McCoy: Covid-19 crisis a threat to both health and economics

---

The financial shock from Covid-19, while still significant, will be more drawn out. Part of the reason for this has been the Government’s ability to step in and shield workers from the fall-off in income.

Instead of nationalising the banks, this time we’re nationalising part of the private sector wage bill, albeit temporarily.

As of this week, there are more than one million workers availing of one or other of the Government’s two wage subsidy schemes. According to official figures, 598,000 are availing of the €350 a week Covid-19 Pandemic Unemployment Payment, while 427,000 are on the Government’s Temporary Wage Subsidy Scheme. This is in on top of the 205,000 on the Live Register in receipt of Jobseekers’ Benefit.

So, in other words, about 40 per cent of the workforce are now effectively being paid by the State.

‘Kurzarbeit’ programme

Furloughing workers, wage replacement: these terms weren't in the lexicon back in 2008, but they're now being used all over Europe. The various models being deployed are based on the German "Kurzarbeit" programme, which is credited with limiting the employment shock in Germany after the 2008 crisis and facilitating a swifter recovery.

The combined cost of the two pandemic schemes here has been estimated at €4.5 billion by the Department of Public Expenditure and Reform for the 12-week period to the middle of June.

But the take-up has been enormous, more than the Government had banked on, and the final cost is likely to exceed its original costing.

The Economic and Social Research Institute (ESRI) puts the cost to the exchequer at €800 million per quarter for every 100,000 individuals that lose their job, which is nearer €8 billion, but this figure includes the likely fall-off in tax revenue from having fewer people working.

The big question is what happens after furlough? The schemes are scheduled to end before the Government fully lifts the lockdown. And that’s discounting the possibility that a second wave of infection sends us back into lockdown.

Pulling off the bandage too fast risks a “cliff-edge” scenario, potentially accelerating the crisis, while pulling it off too slowly places too much of a financial burden on the State.

Exchequer returns, published on Tuesday, show the State’s tax base is fast eroding while spending is accelerating at an alarming rate.

Minister for Finance Paschal Donohoe has warned the schemes "cannot be sustained indefinitely", but indicates he plans to "taper" them. They are two ways of doing this, making them more targeted to less well-off workers in more vulnerable sectors, rather than the current catch-all approach, or by cutting the headline rates themselves, or possibly a mix of the two.

The Government’s five-stage plan to exit lockdown will make the schemes more targeted anyway. Construction workers will be back to work in two weeks’ time, presumably taking them out of the equation, in contrast to restaurant and bar workers, who won’t go back until August at the earliest.

Department of Finance officials are said to view the €350 a week Pandemic Unemployment Payment as generous in the context of other welfare payments, particularly for single adults. Jobseekers' Benefit is €204 a week. It's likely they'll take a knife to this first.

Moral hazard

It’s likely that many so-called furloughed workers won’t be returning to work once the restrictions are lifted. The firms and businesses in question may go bust; some may only be able to continue with a smaller workforce; and some may opportunistically use the crisis to downsize. This is a moral hazard that the Government couldn’t really avoid, not given the time pressure it was under.

There are difficult issues to navigate. ESRI economist Barra Roantree estimates that about 250,000 workers in the most vulnerable, consumer-facing sectors, such as hospitality, are renters. Without this level of subsidy, or in the absence of a big increase in rent subsidy, many of these workers won't be able to support their current housing costs, he says.

But keeping the benefits relatively high, at €350 per week, will likely make some workers disinclined to go back to work in these sectors, particularly given the relatively higher risk they have of catching the disease. That could delay recovery.

The Government learnt a trick during the financial crisis of not over-promising and not painting too rosy a picture when there was uncertainty. In its Stability Programme Update (SPU), published last month, it painted a fairly grim picture of the current economic outlook.

It also included two more draconian scenarios where the lifting of restrictions is delayed, linked to risk factors such as a second wave of infections ,or a mutation and/or a delay in finding a vaccine, which bring with them even steeper declines. Managing expectations in a crisis is something the Government has got better at.