The heated rows behind Government doors will be all about Covid

Amidst the relentless procession of screw-ups, accidents and minor calamities – some self-inflicted, some not – which have become a staple of life in Government, there was some good news, of a sort, for the Coalition this week.

Minister for Finance Paschal Donohoe published his pre-budget forecasts, assessing the current state of the economy and its likely progress next year. And it turns out that the impact of the pandemic has not been as cataclysmic as feared back in the spring.

Then, the country was facing an economic disaster of biblical proportions; now it is merely a massive recession. Instead of the economy collapsing by a catastrophic 10.5 per cent this year, the decline is now expected to be a more manageable 2.5 per cent.

So, it’s bad, but not as bad as expected. So that’s good, right?

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Up to a point. Unemployment is worse than expected, though, and 300,000 people have lost their jobs. This is how the harshest effects of a recession are felt – not in the dry economic statistics, but in the daily lives of people. It’s felt through the never-absent stress of financial worries, the diminished life chances, the bright futures turned gloomy, the constant, grinding, spirit-suppressing reality of sudden and unaccustomed poverty. So it is in all recessions; so it will be in this one.

The State has the capacity at present to borrow seemingly unlimited amounts of money, at low rates

The question for policymakers is, as it always is: how to find a way out? And there is a growing view in and around Government that the restrictions introduced to control the spread of coronavirus must be kept as light as possible in order to enable economic recovery to take place. This debate about the management of the pandemic will occupy much time and energy in Government in the coming weeks and months.

There are broadly two views, according to several people who are participants. The cautious view – probably numerically in the minority around the Cabinet table but usually prevalent despite that – believes that whatever the immediate economic cost, the second wave must be suppressed, if necessary by a return of more stringent restrictions. This view is immediately willing to accept a second lockdown that stops just shy of closing the schools again – and doesn’t rule that out if necessary. Its proponents rightly point out that, while the costs of a shutdown are horrendous, the State has the capacity at present to borrow seemingly unlimited amounts of money, at low rates. And they say that everyone’s experience of dealing with Covid-19 so far suggests that acting sooner rather than later is best.

No vaccine

The other side of the argument points out that with no vaccine likely this year or next (this was one of the assumptions underpinning the Department of Finance’s forecasts), the country and its economy must learn to live alongside the virus. It is not feasible for even the present restrictions to remain in place for the medium term, they say, for they will destroy entire sectors of the economy. Many businesses that have struggled through the first six months of the pandemic are now reassessing whether they can make it through another six.

Increasingly, some important people in Government are becoming worried not just about the short-term (and therefore recoverable) damage to the economy, but the longer-term effects which will damage our prosperity for a decade or more. This is the time of the year that thousands of graduates should be going into offices beginning their careers, one Minister tells me. Now they’re not. We are a skills-based economy. And that skills base is being eroded. It can’t go on.

The Government needs to ensure that the least economic damage possible is done in the coming months

Another medium-term danger is also increasingly occupying minds. It is, indeed, possible for the country to borrow vast sums of money at present to replace the lost tax revenues and to fund health services and social welfare payments. But if the economy is smaller when the pandemic passes, it will not be able to support a larger State unless there is a very significant increase in taxation. In other words, we face having a larger State and a smaller economy. You don’t need to be a political economist to see trouble ahead with that.

We can borrow to pay the costs of the pandemic, one senior official says. But we will not be able to borrow on an ongoing basis simply to fund a bigger State in the future. We will have to pay for that ourselves. He didn’t add that we will also have to pay the interest on the debt accumulated during the crisis.

Shudder

The business of shrinking the State while increasing its revenues has a name. It’s called austerity. The politics of that are familiar enough to some people still in Government to make them shudder. They know exactly what Sinn Féin would do to them in those circumstances: eat them for breakfast.

To avoid that outcome to the greatest extent possible, the Government needs to ensure that the least economic damage possible is done in the coming months. That means accepting the higher level of Covid cases that comes with even a partially open economy. Proponents of this view point to the lower hospital admissions and reduced – for now anyway – lethality. We can live with this, they say. We have to.

The public health experts tend to be less sanguine about it. They want to get the numbers down, and restrictions on social and economic life are the only way they can do it.

Normally at this time of year it is the forthcoming budget that is the cause of rows behind closed doors. I recall reporting on a budget row a few years back that featured one angry exchange between ministers audible to officials outside the room. If you listen carefully in the coming weeks, the rows will be about Covid.