Cliff Taylor: What happens when the ECB turns off the magic money tap?

The Government faces a fraught financial juggle in dealing with the pandemic and its aftermath.

So here's the good news. The annual report on the national debt this week from the Department of Finance, a publication generally written to scare the living daylights out of politicians and the public, concluded that the enormous bill is one the country can afford. We can live with the higher debt and not worry about raising cash in the short term to reduce it.

Ireland has borrowed a huge amount of cash to boost the health service and support businesses and individuals through the pandemic, pushing the debt to €239 billion this year.

This would normally be bad news – it certainly was as debt soared after the 2008 crisis and we all paid for it via the USC and other tax hikes and spending cuts. But this time even though the national debt has jumped higher, the cost of paying interest on it continues to fall. The debt is going up, but the debt burden is falling.

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The benefits of being able to borrow at zero – or in some cases negative – interest rates has been enormous. We have refinanced a lot of older more expensive debt in recent years and together with cheap new borrowings this means debt interest consumes 4 per cent of the State’s annual revenues now, compared to 10 per cent in 2015.

There are risks. Ireland will have to roll-over the new borrowings – typically in 8 to 10 years – and we don’t know where interest rates will be then. There is now significant debate internationally about how exchequers should deal with this interest rate uncertainty.

The ECB’s massive intervention in the market will be slowly – very slowly, we hope – wound down once the crisis phases passes. This particular magic money tap will be gradually closed. But there are factors – an ageing population and higher savings rates, for example – which may mean that interest rates will not return to the kind of highs seen in the past.

A key consideration is whether the economic growth rate is greater than than rate of interest on the national debt – if it is, then it helps to keep debt sustainable. So as well as what happens to interest rates, the pace of growth and whether corporation tax returns can hold up are vital factors.

Political rows

So is it a case of "carry on spending" for Paschal Donohoe and Michael McGrath?

Well for now it is. But the spending spree can’t last forever. As the worst of the pandemic – we hope – starts to fizzle out later this year, the first challenge will be to withdraw some of the support programmes, leading to big political rows and likely pushing some businesses to the wall. And beyond that a huge challenge of economic rebuilding awaits.

So while we may not need to raise taxes to pay for the emergency costs of the pandemic, we do need to find a way to pay for the bigger State which is going to emerge after it. We had been heading that direction even before Covid-19, with moves for more State involvement in areas like housing, for example.

How do we make sense of this?

Broadly, we can probably carry the debt from the once-off element of the emergency Covid-19 measures and hope that as the economy grows in future the burden stays manageable. But we need to find a way to pay for additional spending that continues after, say, 2022. And much of it will. We won’t be cutting back the health service. The PUP and wage subsidies may wind down,but some kind of wider increased social supports will remain in areas like sick pay and supports for people who lose their jobs.

And remember the Irish Fiscal Advisory Council (IFAC) argues that more than €5 billion of the extra spending allocated in the 2021 budget is not directly related to Covid-19 and will have an ongoing cost. New rules are needed to guide our budget strategy, the IFAC has said, and it is hard to argue with this.

There are other issues, too. Investments are needed to progress the green agenda. Demographic trends – including an ageing population – will add €6 billion to annual spending by 2030.

Economic growth will, we hope, pay some of the bills by boosting tax revenue. But it won’t pay all of them. We will need to find some new sources of revenue. This is a bit of a toxic issue in Irish politics after the financial crisis and the years of austerity. Increasing the tax burden now, in the midst of the pandemic, or even as we exit would indeed be a repeat of austerity. But looking at how we pay for a bigger State in the years ahead is not.

The Government will try to start putting some context on this in April when it produces medium-term forecasts for the public finances. Minister Donohoe is to establish a commission on tax and welfare. But if ministers are expecting a Sláintecare-type cross-party consensus on this – or even a consensus on how the public finance targets should be set – I suspect they are going to be disappointed.

Instead, there will be fights about just about everything and all the issues put on the backburner because of the pandemic – the local property tax, the retirement age, how to pay for a better health service and so on – will be back on the agenda, along with a lot of new ones.

As the ECB printing presses slow down, normal political rows here will start to speed up as the old choices of where to spend and how to pay for it return. Still, it would be good to get back to some kind of normal politics and rows abut taxes and spending. It would be a sign that some kind of normality had returned to our shores.