Cliff Taylor: You can’t just turn an economy off and back on again
Economic freeze can only go on for so long without causing longer-term damage
An empty M50 in Dublin this week. Photograph: Tom Honan
The battle to limit the economic damage from the coronavirus crisis is all about time. The Government is trying to keep as much as possible going for as long as possible – and the measures it has taken are exceptional in terms of speed and scale. But you can’t just put the economy asleep for a few months and then wake it up again – if only it were that simple.
It’s all about time because, obviously, the longer the restrictions go on, the trickier the economic balancing act becomes. And the immediate problem is cash – or rather the lack of it, in businesses, households and the exchequer. Spending has collapsed and so much less cash is circulating. If the shop is shut, it has no cash to pay its wholesalers, they have no money to pay suppliers, the exchequer gets no VAT and the staff are on some kind of State-funded support and worried about their jobs.
The employees hit by the first wave of closures are younger and lower paid than the average
This can go on for a short time without major damage, but not for long. And with talk of the restrictions being extended beyond Easter and then lifted gradually – and uncertainty beyond that – the cash squeeze in business is deepening. Chambers Ireland, which represents many SMEs via the chambers of commerce network, has said it is like some kind of “mini ice-age” for businesses.
This is about the domestic economy – the bit which relies on spending by Irish consumers. The employees hit by the first wave of closures are younger and lower paid than the average – the tens of thousands employed in pubs, restaurants, coffee shops, non-food retail stores, construction and so on.
Supporting the incomes of those not working and encouraging employers to keep as many on their books as possible was the right thing for the Government to do. As well as trying to position businesses to reopen more quickly, it keeps some cash circulating. And the availability of three-month relief for those having difficulty paying their mortgages and the help aimed at renters were also appropriate.
Some of these measures may need to be extended – and here again we are back to time. How long can the Government sustain special supports for those not working because of the pandemic? How long can the banks hold off from classifying someone as being in arrears if they can’t pay their mortgage?
This is the sharp end of the crisis. And this cash shortage in households is reflected across the business sector. Whether it is a chief financial officer in a big operation or the owner of a pub or restaurant, the questions they are asking themselves are the same. How long will this go on for? How do I manage – or survive – through it? And what will the world look like afterwards?
As it did with income supports, the Government is likely to increase its initial programme of business supports to try to address this cash crunch. On Friday Ibec, the business group, called for a scheme of guarantees and cheap loans which it calculates would cost the exchequer a maximum of €5.9 billion. Detailed work is going on in Government and the Central Bank to try to work out how best to address this credit issue and how deeply the State should be exposed.
There are questions here in particular about the terms and conditions of assistance for big businesses – some of whom have thrown out big dividends to shareholders and big pay to bosses. But the real challenge is to get help quickly to the SME backbone of the economy, to keep as many as these firms as possible above water and to keep some cash flowing through the economy’s veins.
And here we come back again to time. Like special supports to employees and to keep people in work, underwriting credit to businesses can only go on for so long.
I don’t know how long is too long. A colleague asked me this week whether I thought there was a tipping point – a time when the sticking plaster of emergency supports can no longer work. I don’t know. I suspect it might not be the same for all sectors, businesses or households – but the period of sleep, or deep freeze, can only go on for so long without causing serious longer-term damage. You can’t just stop everything dead in its tracks and restart it again just as it was. Sooner or later a shortage of cash puts companies out of business and households into debt.
We can hope that while the economic hit will be significant, the worst of it may pass quickly
It is hard to strike the right balance. I find some of the Government rhetoric about putting the economy to sleep, waking it up and then “rebooting” it a bit irritating. Like “cocooning”, or “furloughing” staff, it is trying to put some nice language around something which is pretty unpleasant.
But there is no point in getting mired in pessimism either. Yes, there are big economic dangers here and the figures this week showing half a million people reliant on supports – which will rise quickly – are scary, But we have chosen to shut down parts of the economy for good health reasons and at some stage they will be reopened. Some sectors should show a decent and rapid bounce. Others will recover in time. The economy is in a lot better shape than it was going into the last crisis. We can hope that while the economic hit will be significant, the worst of it may pass quickly.
Some really difficult decisions lie ahead. The conundrum is this. From a health and economic point of view the goal is exactly the same – controlling the virus. But if the restrictions are extended, then the short-term economic damage is greater. And the job of waking the economy up from its slumber is all the more difficult.