Donohoe sees political trap amid rising debts

It's not a distinction he welcomes, but Minister for Finance Paschal Donohoe is presiding over a quite spectacular rise in Ireland's national debt, forecast on Thursday to hit a record €239 billion this year.

Donohoe is phlegmatic about the distinction, arguing that desperate times call for desperate measures, and pointing out – correctly – that he is bang in tune with the new international fiscal orthodoxy, borrowing big to support economies and societies during the unprecedented challenge of the global pandemic.

It’s an approach both endorsed by and facilitated by central banks, governments and the markets. But Donohoe also knows that he is setting a political trap for himself.

The massive expansion in State spending to support public services and businesses was “extraordinary . . . and needed”, Donohoe told reporters on Thursday on publication of the annual debt sustainability report by his department.

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But he has also signalled that when the pandemic is over – and despite the problems with the availability of vaccines and the current lockdown it is not fanciful to think that within a 12 month time-frame – there will be a reckoning.

The State is currently borrowing vast sums to meet the costs of the pandemic – but not just that. For example, of the extra €4 billion or so in health spending this year, €2 billion is non-pandemic related.

Donohoe knows it will not be possible for the State to continue to borrow to finance current expenditure increases on this scale. So a choice will present itself – to pay for the bigger (and more expensive) State through increased taxation or to shrink the size of the State.

"We've massively increased the size of our State to deal with this disease, to deal with an emergency, and if we want to keep the State permanently bigger for longer, then there will be costs involved in that," he told RTÉ on Thursday.

That’s the political trap. Any reduction of State supports, for workers or for public services in the wake of the pandemic will be labelled “austerity”; so will tax increases to pay for it. Neither option is likely to be popular. Donohoe’s political opponents can see it a mile off.

Opportunity

"I think it's an opportunity to reimagine the role of the State," says Labour Senator and economist Marie Sherlock. "For example to reimagine the sort of health service we want."

She acknowledges that a bigger State is a more expensive State, but says “we have to grasp the nettle” on that question. A debate about who pays is inevitable.

For Pearse Doherty, the Sinn Féin finance spokesman, Covid has exposed the shortcomings of the Irish model", which he says is "low tax, low spend".

He and his party have been arguing for a greater State role in areas like childcare for a long time. Now, he says, “there has been a shift in public opinion” .

He also acknowledges that additional taxation to pay for the bigger State will be part of the conversation. “But there can be no going back to the old model that failed us.”