Cliff Taylor: Government must dig deep now in hope of a better 2021
After a nervy winter, focus will be on reducing long-term economic damage from Covid
Non-essential items are sealed off in a Tesco store in Cardiff, Wales, as the country entered a national ‘firebreak lockdown’ on October 23rd to curb the surge of Covid-19 cases. Photograph: Matthew Horwood/Getty Images
It’s going to be a nervy winter. Restrictions are tightening all across Europe as talk of living with the virus is replaced by emergency action. Meanwhile, the economic cost in terms of Government deficits and rising unemployment is climbing. The hoped for V-shaped recovery has long been written off – maybe it will be more like a W, or a rollercoaster.
A couple of months ago, in the course of researching a piece, someone said to me in passing that 2021 would of course be better than this year. It took me a while to work out why it sounded odd. I think it is because even if next year is better than this one, it won’t be back to pre-Covid 2019, which is what we all take as our frame of reference. But it will, let’s hope, be better than 2020.
We may be in some kind of middle ground next year in terms of dealing with the virus, with vaccines in sight, or starting to arrive, improved treatments and debates about how life and the economy need to be managed as this all happens.
Let’s hope we can avoid the threat of successive major lockdowns and reopenings, as the toll on the domestic economy is climbing quickly.
Mad, mask-free Christmas
This will require using what information we have on where the areas of highest risk are – and ongoing changes in our behaviours to keep the virus suppressed. No point planning for a mad, mask-free Christmas if it leads to more infection, sickness and a lockdown in January.
Heading towards 2021, we need to be clear where the big economic risk lies: it is jobs and unemployment and the deep damage threatened by waves of business closures.
The public finances are a problem, too, of course, and budget deficits are going to rise again here and across Europe. But the ECB underlined this week that it will keep interest rates low and maintain its extraordinary support for Government borrowing for the foreseeable future. When lenders realise that the ECB is there to buy as much as countries want to borrow, it is a powerful tool.
So for now the Government here – and those across Europe – have little choice but to keep on spending to try to bail out the troubled sectors. The goal is to try to lessen the long-lasting structural damage to economies as the second wave of the virus is met with the second wave of restrictions.
Former IMF chief economist Olivier Blanchard tweeted this week that the budget cost of this to governments will be very significant – in some cases more than the first wave. Back in spring companies could be bailed out by delaying bill payments, he said. Now many will need cash to survive, and wider consumer and business confidence will be damaged further.
Governments are in deep and going deeper. The supports put in place for businesses here are significant – unprecedented in an Irish context. And other European countries are acting too. Germany has just announced an extraordinary programme of support, involving replacing 70-75 per cent of the turnover of businesses hit by its latest restrictions due to last through November – which are a bit less severe than here. It will cost €10 billion.
Here the Government has to stick with it too. Tax receipts have held up remarkably well so far, which has helped to pay the bills, but data published by the Revenue Commissioners this week showed income tax receipts falling back behind 2019 levels again for the month of September. This pressure on receipts may well continue in October – and beyond – given the strains on the jobs market. This is one to watch.We are ever more reliant on strong corporate tax receiptsand the strength of the FDI sector.
The more we can control the virus while keeping as much as possible of the domestic economy open in future, the more we can, like Germany, focus big help on those who have to remain shut, or very restricted.
A key decision this time was to close much of the retail sector. The row over what retail goods are essential reminds those of us with grey hair of the fall of the 1982 Fine Gael-led government over a budget which imposed 18 per cent VAT on shoes. The government argued that children’s shoes had to be included because, if not, smaller women could benefit from VAT-free footwear. It fell on the budget vote.
Evidence-based A detailed evidence-based analysis needs to be undertaken of the latest shutdown to see what we can learn for 2021, how we can try to stop the virus surging back again and how best to act if it does. It is a really difficult balance, given the damage which virus spread itself does to the economy and confidence – and of course to people’s health.
In the months ahead it will become clear that some companies – big and small – are gone and the people they employed will have to look for work elsewhere . There will be questions, still very hard to answer, about the future for sectors such as tourism, travel and hospitality.Will people be queueing to travel when the worst of this has passed – like they queued outside Woodies after the first lockdown – or will the majority remain too nervous to get on a plane?
But the damage caused during the crisis will shrink the domestic part of the economy and thus hit tax revenues for the years ahead. Meanwhile, Covid-19 has underlined a trend which was already under way for greater State involvement in the economy. We already saw it in areas such as housing, and now spending in health and social security will not return back to where it was before. For these two reasons more taxes will be needed – maybe not next year, but soon enough.
Post Covid-19, this will be the great debate.