New government faces five key economic challenges

Negotiating a programme for government in the midst of a global pandemic was never going to be easy. The document that emerged contains important policy directions and some firm commitments – but also many aspirations without much detail or costings.

So what will this mean for the economy and for businesses?

Here are the five key pointers to take about what the programme means for the next government and the crunch decisions it will take.

1. The Autumn reckoning

With three parties involved in negotiations, the document contains a range of economic commitments coming for each of them. The Green Party got obvious wins in areas like retrofitting and renewable energy, as well as investment in cycling and walking and the overarching carbon reduction target. Fine Gael is trumpeting the commitments to reduce borrowing and to index tax credits and bands after 2022. Fianna Fáil points to elements of its housing policy and supports for SMEs including a commitment to review the capital gains tax, as well as housing policies.

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However, while the programme contains a raft of commitments and promises, it does not timetable or cost most of them, and in the majority of cases does not set a clear numerical target.

This may not cause an immediate problem. The first job of the new government, if it takes office, will be to agree and implement the promised July stimulus, likely to include the passage of legislation to enact the promised credit guarantee scheme – the terms of which are likely to be made more generous – and to allow ongoing delays in tax payments for business. Some investment programmes may also be flagged at this stage.

But come September, work will start on Budget 2021 and the three parties will have to finalise the National Economic Plan, which will be the blueprint for what they plan to do during their term and how they would pay for it. This is when the targets must be set and budgets agreed.

The initial spend heading into next year will be funded by borrowing – the question will be how much to borrow and where to spend the money. And remember that as well as business and ongoing income supports, there will be demands from a whole range of State agencies and bodies.

If the stimulus strategy works, then higher growth will help to cut the deficit in 2021 and into 2022. But at some stage, possibly in 2022, the Irish Fiscal Advisory Council (IFAC), the budget watchdog, has said that extra taxes or spending reductions will likely be needed to reduce the deficit and the debt burden. The National Economic Plan will not outline all of these, but it will set the scene by developing targets for the public finances. And these could lead to significant tensions.

Beyond that, further resources will need to be found to pay for additional new commitments in the programme – particularly plans to increase current spending in areas like health, education and childcare. As Prof Alan Barrett of the ESRI told the Covid-19 committee this week, long-term moves towards a bigger role for the State must be paid for.

There could be scope in the capital budget to delay some items to meet new investment priorities in areas like public transport,renewable energy and retrofitting. A review of the existing capital programme will scope this out and could lead to tensions, notably in relation to roads.

Some items could be hugely costly – for example electrifying more train lines, retrofitting homes, or promoting the use of electric cars ahead of the commitment not to licence any more petrol or diesel cars after 2030. An official study has estimated that current incentives cost around €1.25 billion for every 100,000 cars. And there are over two million private cars on Irish roads.

In terms of day-to-day items, a lot of expensive plans are outlined. After 2002 the indexing of the income tax system and – if it is decided to do it – delaying the increase in pension age could cost a combined €1 billion a year. IFAC representatives at the Covid committee referred to estimates showing that current spending on introducing Sláintecare could require annual spending increases of around €400 million each year over six years, as well as once-off costs of €3 billion spread over the same period. Some of this may be kicked into the long grass, however, as the programme says the full cost and funding of Sláintecare may not be assessed until 2022. But it can’t be ignored in the national economic plan completely.

There is no doubt that the new government, if it takes office, faces its first big crunch in the autumn as the aspirations of the programme for government are turned into the reality of a costed plan.

2. The Covid-19 fall-out

Much will be framed by the path of the epidemic. However, it is clear that whatever this is, the next government takes office as the full impact of a massive economic crisis hits. To an extent the economy has been on hold, with incomes supported, loans deferred and the feeling of a temporary hiatus in activity.

By autumn it will be clear that many businesses cannot reopen, others will be barely ticking over and the unemployment rate, while down from current highs, will still be well into double figures, possibly at about 14-15 per cent. The next government faces the job of winding down or amending the existing supports and trying to help businesses get through. The demands for cash will be endless and there are commitments for a range of sectoral forums from where these will emerge.

The programme says an urgent economic review will be undertaken under the aegis of the Department of the Taoiseach, which will identify sectors that can prosper, given public health advice and economic trends. In turn these are the ones to get priority from a new national recovery fund, a key part of the new national plan. The unspoken question here is what happens to sectors which have a less certain outlook, or face ongoing problems from Covid-19 which will stunt their growth? Are they supported in the hope that the epidemic will eventually pass completely? These have the potential to be hugely contentious and difficult calls, quite possibly made against the backdrop of ongoing uncertainty.

3.The Carbon challenge

For the Green Party, the 7 per cent per annum carbon reduction target is central – and the pandemic may mean a significant reduction in year one, even though experts disagree on the likely scale of this. The issue beyond this year, assuming growth has resumed, is that achieving quick progress on cutting emissions will be difficult. This is because many of the vital investments will take time to bear fruit – the new Metro, for example, or offshore wind energy infrastructure will not reduce emissions until well into the future. The key documents here will be the binding carbon budgets to be agreed and published, putting flesh on the bones of the plan and outlining how the longer-term targets will be met. Delivering on this – taking action – then becomes vital.

One of the big-ticket items is the promise to retrofit 500,000 homes over the next 10 years, a project which could cost some €25 billion or more. While much of the bill will fall on households over time, the State will have to pay for retrofitting local authority houses and give generous grants and up-front support to households. Part of the funding from carbon taxes is to help with this and new financing mechanisms are to be examined – a State body, possibly the ESB,will be appointed to take a lead role.

Persuading householders to sign up to this is a big challenge, given the cost – at least €40,000 per property on existing models, the long payback time and the inconvenience. New technology and models pioneered in the Netherlands may point a way forward here, allowing much work to take place off site, a relatively quick turnaround and even the possibility of homes producing excess energy via solar panels, which can be sold back to the grid, as well as major heating savings.

There is a big potential opportunity here for businesses – though it remains to be seen how the pull on construction resources will sit alongside the plan to up the building of social houses and homes more generally. The recession may leave more scope in this regard.

4.The Housing Dilemma

The programme points towards a bigger role for the State in the housing market, notably via the commitment to increase the local authority housing stock by 50,000 and also promises to develop a cost-rental model and State-supported programmes to provide affordable housing. There is even a plan to examine the idea of a State-supported mortgage for first-time buyers, as well as expanding the Help-to-Buy scheme.

Here we see a mix of approaches from the three parties. Marrying this into a coordinated programme will be a big challenge and the issues faced by the last government remain – notably the cost of land and of building. House price falls due to the economic crisis may be a factor here, but higher unemployment will also mean more people need assistance and more will fall into mortgage arrears.

Dr Lorcan Sirr, senior property lecturer at the Technological University of Ireland, said that a big question is whether the State will plan to build the new homes itself, or purchase them from developers. Own-build via local authorities or housing agencies can deliver units at less than €250,000, he said, indicating a total building cost of €12.5 billion over the five years. However, he said the likelihood remains that many of the houses will be bought from developers at higher prices or leased, pushing up the cost of delivery.

Whatever precise route is chosen, increasing social and affordable supply is a big issue. Dr Sirr points out that in recent years local authority housing output in Dublin has fallen, meaning more properties have had to be purchased to fill the gap. “ It is going to be a big operation to reverse that,” he said. With private contractors also facing uncertainty due to the crisis and financial pressure as sales levels fall, getting the housing sector moving will be a really challenging job.

5. Unknowns

Dealing with the unknowns. And then there are the uncertainties – and these go beyond the pandemic. A big looming risk is that the UK leaves the EU trading regime without a deal at the end of the year, meaning trade will be conducted on WTO terms. If this happens then some sectors, particularly food and agriculture, will face high tariffs in selling into the UK market. The beef sector would be particularly exposed. A no-deal Brexit would be an unwelcome double whammy along with the Covid-19 hit.

Beyond that lie the familiar uncertainties on international tax reform – with international takes on this issue again in trouble – and changing investment trends. All new governments face risks and have to amend their plans as events unfold, but it is fair to say that the level of uncertainty the new government would face in the economic arena is unprecedented.