Coronavirus will create multiple challenges for the next government

The problems are piling up for the next government. As if housing, health, corporation tax, and Brexit were not enough, coronavirus is now dominating all other issues. Although it is being handled by the current temporary administration, the new government, whenever it is formed, is likely to have to deal with the multiple challenges that the outbreak poses for Irish society.

The strategy adopted in many countries, such as Ireland, should slow the progress of the virus, but the common advice of experts in Ireland and across Europe is that it is quite possible that a substantial proportion of the population may end up being infected. By slowing the progress of the disease, it may ease the likely massive pressures on the health system, and it could also significantly reduce the number of people eventually infected.

In turn, this could reduce the eventual number of deaths. However, the longer the health crisis continues the bigger the economic impact.

It is the disruption yet to come in Ireland and elsewhere in Europe that will seriously impact on the economy

The key priority for the current administration is to manage the crisis and minimise the impact on the health of the State, and that will also be the predominant initial challenge facing the incoming government. While the direct health effects are clearly the primary concern, there are already significant economic costs that are likely to become much more obvious over the next six months.

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We have seen how, in China, measures to control the outbreak closed down the economy in the region most affected. In turn, industrial output has been dramatically reduced in the first quarter of this year. The knock-on effects of this are felt across the world in a reduction in supply of Chinese-manufactured goods, such as phones and computers.

While this fall in Chinese output has not affected the Irish economy directly, it may show up in our national accounts for the first quarter of this year as a small fall in Irish output. This is because profits arising from the manufacture of electronic goods in China, on behalf of foreign firms located in Ireland, are treated as Irish output. However, this would be a statistical artefact, of little meaning.

It is the disruption yet to come in Ireland and elsewhere in Europe that will seriously impact on the economy.

The nature of the coming economic slowdown will be very different from that of the financial crisis. And the Irish economy is in a much better position to withstand its effects. Because the public finances have been rebuilt since 2011, the government is now able to borrow whatever is needed to temporarily expand the capacity of the health system and to protect workers and SMEs adversely affected.

This time round, the initial impact of the disruption to the economy is likely to fall more on business than on households. The change in social welfare rules will help protect the income of workers who have to stay home. Some, however, may lose their jobs in companies that don’t weather the storm.

Reduced spending

Even before any compulsory measures kick in, people will stay at home more, reducing spending on entertainment, travel and holidays. This will aggravate the problem for businesses like pubs, restaurants and theatres, or others that rely on footfall. While the health crisis persists, it would be ineffective to try and stimulate the economy by giving more money to households as they will just stay at home and save it. Instead, support to certain vulnerable businesses will be needed to help them survive the temporary shutdown.

It is too soon to determine the nature and magnitude of what fiscal response will be needed, beyond the €3 billion package already announced

Whatever other forms it takes, a cut in the VAT rate would have little benefit, as lower prices are unlikely to induce people to come out and about and spend while the health crisis is at its peak.

Though the disruption may not last beyond the third quarter of this year, the economy in Ireland, and elsewhere in the developed world, may not fully bounce back when the epidemic is over. If that is the case, a co-ordinated fiscal response across the euro zone will be the best answer. There are signs that a less hard line response will be forthcoming than after the 2008 crash. Monetary policy measures may also be needed because of a fall in inflation.

Given the extreme uncertainty as to how the epidemic will play out over the next six months, it is too soon to determine the nature and magnitude of what fiscal response will be needed, beyond the €3 billion package already announced. Restoring the economy to health will be a key consideration for the incoming government’s first budget.