The great reckoning: Removing Covid supports

What will the economy look like when the fiscal stimulus is removed?

Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath. A debate over where future  emphasis should be on tackling the public finances or spending on vital public services and infrastructure  is already emerging. Photograph: Julien Behal Photography

Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath. A debate over where future emphasis should be on tackling the public finances or spending on vital public services and infrastructure is already emerging. Photograph: Julien Behal Photography

 

There’s a fear that the economic fallout from the pandemic has yet to catch up with us. That sounds like an oafish thing to say in the context of mass unemployment – it’s currently 24.8 per cent – and the closure of wholesale parts of the economy.

But the real economic feel right now is nowhere near as bad as it was after the 2008 financial crisis. Back then we were broke, and borrowing wasn’t an option. Unemployment wasn’t temporary either, it was permanent. It’s reasonable to assume that a large section of the 600,000 people who have lost their jobs as a result of current restrictions will return to work once they are lifted.

Underpinning all this is a huge Government stimulus package – the largest fiscal accelerant ever applied to Irish economy, and one that has effectively nationalised part of the private sector wage bill.

This, combined with the European Central Bank’s pandemic emergency purchase programme which is keeping interest rates, and therefore borrowing costs, at historically low levels, is shielding many of us – not all of us – from the worst global recession since the second World War.

The big question is what happens when these supports are removed, as they will have to be sooner or later.

Once fiscally hawkish countries such as the Netherlands and Germany sound the retreat, we will all have to take our leave. That’s the way the system works. You can’t stand out financially or you’ll be punished by the bond market. Minister for Finance Paschal Donohoe has repeatedly talked about positioning Ireland in the middle of the pack in terms of borrowing so as not to be viewed as the weakest link in the event of another debt crisis.

A debate over where the emphasis should be – tackling the public finances or spending on vital public services and infrastructure – is already emerging. Donohoe believes it was the cautious management of the public finances in the first place that has allowed the current spend, while other groups, such as Ibec, insist years of chronic under-investment can only be tackled with a less-than-cautious capital spend.

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