Government starts the treacherous job of unwinding pandemic supports

Government ministers know that the the economic decisions they faced when the pandemic hit last year were huge, but that starting to withdraw the massive supports would be a lot trickier. Taking money away from people – even emergency supports – is bound to be politically controversial. And in economic terms trying to support sustainable jobs and incomes as the economy reopens also involves difficult choices – and not a little guesswork.

In trying to manage this, the Government is promising to spend significantly more money – €3.6 billion in cash terms and close to €5 billion if you count in tax measures – in the months ahead. It is a substantial extra commitment– bringing total Covid-related spending to €38 billion – but then the economy has been hit by an extraordinary shock and the State is trying to fill the gap. As Taoiseach Micheál Martin put it, there is enormous damage to be undone.

Decisions

The Government took the correct decisions last year to support jobs and incomes – and it has significantly limited the damage in the meantime. And as the pandemic continued, so have the supports, pushing the exchequer finances into the red. The latest measures are likely to add another €2.5 billion plus to bororwing this year. It has been an unprecedented economic programme and so winding it down will not be easy. Phasing the emergency spending down was inevitable – the only question has been when.Otherwise the Government would be left with zero room for manoeuvre in the years ahead.

Extending the supports in some form until the end of this year does give a cushion to those who are not able to return to work – but there will be a significant minority cannot return to work and face a jarring drop in their income.This is where the political debate will be centred and the Government knows it will be treacherous. While the PUP is the sharp edge of this debate, the wage subsidy scheme is also going to be wound down, though significant more sectorally-based business supports will remain. These will save jobs – but as the plan says, the economy will not go back to its 2019 state. The world has changed, consumer behaviour has moved on and a big transition lies ahead.

How will the Government wind down the PUP and wage subsidy scheme?

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Much will depend on how quickly the economy rebounds on reopening. Already tens of thousands are returning to work and the numbers on supports have fallen. Some of the economic indicators are encouraging and many consumers have a lot of cash to spend.

Rebound

The overall economy should rebound strongly – though perhaps not quite " like a rocket" as Tánaiste Leo Varadkar predicted. His hope that there might be room for welfare increases and a tax cuts package in the budget for next year also appears, well, optimistic.

There are two caveats. One is that we do not know the course of the pandemic and whether reopening will be smooth. The language of the recovery plan makes clear that the decisions on winding down PUP and wage subsidies will be revised if the reopening is delayed or any restrictions reimposed. This is the correct approach and politically inevitable.

The second caveat is that while overall growth may rebound, some sectors remain in deep trouble.Sectors like tourism, hospitality, aviation and events – and their employees – will require significant ongoing supports. Significant help is promised, but calibrating it will be difficult.

The economic recovery plan also outlines new spending in a range of areas, notably training and environmental projects, some linked to funding from the EU’s recovery programme. More will be outlined in two documents published over the summer, one on a so-called Pathways to Work – a vital issue given the unemployment overhang after the pandemic. The second will be the revised National Development Plan outlining the State’s investment plans. As ever the success of this will be as much – or more – about delivery as vision.

Vital

Meanwhile the long-awaited – and vital – reform of the local property tax is finally going ahead, underpinning this modest extension to the overall tax base. This will mainly affect those who bought properties from 2013 on and have paid no tax to date – a crazy situation. Again, this will be politically controversial, with Sinn Féin long-targeting this tax as “ unfair.”

A third document will also be published over the summer by the Department of Finance will try to put some shape on how all this fits into the public finances. That was the – glaring – omission from today's plan. Hints were dropped at the leaders' press conference that better welfare supports for the initial period after people lose their jobs are being studied, post pandemic. This would likely be funded by higher PRSI payments, for employers and employees, an option raised in the plan. Employees may also face being auto-enrolled in pension schemes.

These are hints on the future direction of policy. One of the key changes post- pandemic will be more State spending and more investment – but also higher taxes and charges in areas like PRSI. And this will all bring its own controversy.