Irish Times view on the economy after Covid-19

The prolonged lockdown is adding to the already high costs to the pubic finances of the Covid-19 pandemic. New research from the Central Bank underlines that these supports were essential and that without them the economic shock would have been even greater. However it also points to the difficulty of managing the public finances in a sustainable way in the coming years, not only due to Covid-19 but also a range of other spending pressures.

Assuming the crisis eases as vaccination numbers rise, the Government will face a dilemma in how to withdraw existing supports

Total additional spending commitments last year amounted to €24.6 billion, according to the Central Bank's latest Economic Letter. The increase in expenditure here in the first three quarters of last year was the second highest in the euro area. It underlines the key role of European Central Bank support in allowing this to happen, by holding down borrowing costs. In common with other bodies, such as the ESRI and the Irish Fiscal Advisory Council (IFAC), the Central Bank says that spending must continue on support programmes for now. The latest ESRI quarterly commentary suggests that the low interest rate environment gives significant additional room for manoeuvre – for as long as it continues.

Assuming the crisis eases as vaccination numbers rise, the Government will face a dilemma in how to withdraw existing supports, while also helping shattered parts of the economy to restart. Minister for Finance Paschal Donohoe has said there will be no rapid withdrawal of supports – though he has cautioned that at some stage more normal budgetary constraints will reappear.

Meanwhile spending is rising more generally.There were €5.4 billion in additional commitments in Budget 2021 outside of Covid-19 measures. In the longer-term, IFAC chair Sebastian Barnes has pointed to pressure in areas such as the ageing population, healthcare and climate change. The State can carry the once-off pandemic debt on its balance sheet but permanently higher spending needs additional revenues. Economic growth can help but we cannot rely on a repeat of the rapid economic expansion and corporate tax bonanza of recent years.