Cliff Taylor: ECB has provided the vaccine for our precarious public finances

The Christmas period is usually one to draw breath, but 2020 hasn’t given us much opportunity to do that. This year’s run into Christmas has been one we will always remember. It has been a devastating year for the domestic economy and the fallout next year will be enormous.

Fortunately, the public finances have come through better than had been feared. The Brexit trade deal also leaves more scope in the budgetary sums for next year. This means the Government still has scope to support businesses and individuals hit by the new restrictions and to continue to invest in 2021.

The appearance of Covid-19 vaccines has changed the calculation here. There is a better chance for many businesses to make it through now, assuming that by the summer we are in a period of, at worst, lighter restrictions. That makes the case for continuing Government supports for those affected all the greater, as there is some kind of an end in sight.

And the State finances can afford it – for now anyhow. Next week we will get the final tally in terms of what the Covid-19 crisis has cost so far when the Government publishes the exchequer returns for 2020. Remember earlier in the year there were fears that the deficit could head as high as €30 billion as spending soared to deal with the pandemic fallout and there were fears that taxes would collapse. Well, the spending bit of the equation continued, but tax revenue held up remarkably well.

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It now looks like the deficit (using the European Union’s general government deficit measure) will be in the €17-€18 billion range, down from €21.6 billion predicted in October’s budget.

Of course, central to the ability to borrow so much, so quickly has been the extraordinary actions taken by the European Central Bank (ECB), meaning euro-zone governments can raise money at nominal – or in some cases negative – interest rates. Despite the massive rise in borrowing and expansion of the national debt, the cost of debt servicing this year will fall to €4.7 billion from €5.2 billion in 2019. The benefits of refinancing older, more expensive debt more cheaply have been enormous. The ECB has provided the vaccine for our public finances.

While the upside of this year has been the resilience of much of the economy, the outlook for these consumer-facing sectors remains of huge concern

It is difficult to get a handle on the Irish economy given the extraordinary twists caused by multinational activity. Some of this has little to do with real activity in the Irish economy, but some does. Corporate tax revenues continue to rise. Repeated warnings that Ireland may be too reliant on this potentially-volatile source of revenue are worth heeding – but in 2020 it was a huge bonus. And while international tax reform may threaten revenue in the years ahead, it should not do so for 2021.

With the ECB promising to continue to support the market, the early months of next year could see more of the same – heavy Government spending to support sectors forced to close or restrict activities. The end of 2020 suggests, unfortunately, that a rocky road lies ahead for the next few months as restrictions are reimposed.

The vaccine should help to save lives from day one of its arrival, but how soon it will allow restrictions to ease is hard to predict. The beleaguered tourism and hospitality sectors face a fraught start to 2021 with tens of thousands being laid off for the third time.

While the upside of this year has been the resilience of much of the economy, the outlook for these consumer-facing sectors remains of huge concern. Even with Government support, many will run out of road, leaving behind an unemployment crisis which could see the jobless rate well into double figures through 2021. Beyond that lie deeper questions about what these sectors will look like in the long term and how the way we live our lives in the future will affect them.

But one thing is certain: the worst-hit sectors – and individuals – will need more support in 2021. A complex job awaits the Government in both continuing emergency supports – for a significant part of the year probably – and developing longer- term strategies to help rebuild the damaged sectors and support those out of work.

In terms of the overall economy, consumer confidence will be key. Some €11 billion in additional savings this year are available to be spent. New restrictions will limit people’s ability to spend in the early months of the year, but after that the outlook should brighten.

Would you rather the country spent €500 million a year extra to hold the pension age at 66, for example, or use the cash to help retrain the cohort that has lost work?

The rescue programme for the worst-hit sectors and those who worked in them is going to be long, multi-faceted and costly, including longer-term business supports and assistance to those out of work. In the past the Irish economy has shown it can create jobs quickly and it can again. But the extent of damage to the consumer- facing sectors and the dislocation of their employees means special supports will be needed, for example, in retraining and support, incentives to rehire and so on.

Many of those worst affected are younger, have little cash and their prospects have been completely upended. The Government has supported their incomes through the pandemic, but rebuilding their prospects and opportunities requires a clear decision to prioritise resources towards a group with little traditional political clout. In time, it will be clear that this requires decisions to spend less elsewhere or raise more taxes. Would you rather the country spent €500 million a year extra to hold the pension age at 66, for example, or use the cash to help retrain the cohort that has lost work?

Fortunately the State’s finances give some leeway for the months ahead. And the ECB’s action will continue to give Ireland flexibility. The State’s financial scope is not limitless. But the outlook for 2021 has been given a big boost by the arrival of vaccines and the last-minute Brexit deal.