Government must dive in to save jobs but some decisions will be politically explosive

The new Government will immediately face the economic reckoning from the first phase of the coronavirus crisis.

Soaring unemployment and the threat facing many companies big and small means it will have to move quickly – and do so even as the future path of the virus remains uncertain.

Taoiseach Micheál Martin pointed out on Saturday that close to 900,000 people remain supported by special schemes introduced in response to Covid-19. It is an unprecedented economic and financial challenge and the Government faces some big decisions in its early weeks.

As large parts of the economy reopen, the cost of the lockdown and the ongoing economic toll of the virus will quickly become clear as many people find their jobs gone and many companies fail to reopen. Normal seasonal work in tourism will disappear.

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That said, this is no ordinary recession and many parts of the economy have continued to operate at or close to normal levels. Some sectors have been hit really hard and some hardly at all – younger employees, often with few qualifications have been among the worst hit.

Saving businesses and jobs will be the first economic priority and the Government is facing a wave of demands for help. With businesses in affected sectors running out of cash, legislation is promised urgently to bring forward a €2 billion scheme of credit guarantees for companies as well as to allow ongoing forbearance by the Revenue Commissioners.

New Minister for Public Expenditure and Reform Michael McGrath clearly indicated on Saturday that the planned support schemes will be extended. Further sectoral supports and larger grants for small and medium-sized enterprises are also likely.

New supports

As businesses restart, the hope is that more and more people will come off the pandemic unemployment payment, which now has 465,00 claimants, down from more than 600,000 at its peak level.

The task of reducing and eventually phasing out this payment will be economically delicate and politically explosive. The temporary wage subsidy scheme, which pays part of the wages of employees in companies suffering a big drop in revenue, is likely to be retained for longer, though it will probably be amended.

New supports for companies who can afford to take people back only on a part-time basis are also likely, as well as major training and job-placement programmes.

An economic review under the aegis of the Taoiseach’s department is to be undertaken and as well as identifying opportunities it will have to take a view on the future of sectors such as hospitality and tourism.

A really difficult question is what level of supports to direct to sectors which may face long-term challenges from changed consumer behaviour, such as parts of the tourism sector. Deciding where to direct help – and where it may not be worth doing so – will be hugely controversial.

After the interminable negotiations, the Government promises to hit the ground running. Legislating for the new business supports will be key parts of a promised July economic stimulus, as will supports for retraining and additional public investment.

The Government will want to make some impact with this package, though the key decisions will be made in the autumn, when the budget for 2021 is published, along with a a national economic plan for the years ahead.

By the autumn, the new administration will hope to have a better handle on the economic outlook, including the likely size of the budget deficit, which could head for €30 billion this year.

Whether the UK will leave the European Union trading bloc without a new trade deal should also be clear – a vital issue for the food sector in particular.

Climate goals

The Government will want to match the need for economic stimulus with other goals by spending money on areas such as retrofitting old houses and building new ones.

Starting the process of meeting the climate goals will require significant investment in areas such as renewable energy and public transport – other investment may be long-fingered .

Reappointed Minister for Finance Paschal Donohoe and McGrath will have to decide how to strike the balance between the necessary additional spending and budgetary prudence. Caution will take second place for now as existing spending plans are ramped up.

Borrowing costs are remain low for now, with European Central Bank support promised for the market to mid-2021, though the two ministers will recognise that there is a limit to the amount which can be borrowed. There is a promise to reduce the deficit each year and move the budget back towards balance.

The new economic programme will put flesh on these commitments. It will thus force the three parties to address the trade-offs not faced in an aspirational programme for government – and to consider how to pay for big spending commitments in areas such as health and education. Sparks could fly. A new tax and welfare commission may allow some of the decisions to be deferred.

There has been some slightly better-than-expected Irish economic data in recent weeks. But due to the virus, forecasting with any confidence is impossible. For now, the new Government has little choice but to dive in, try to save as many jobs and businesses as possible and see where things stand in September.