Stop looking in the Rear-View Mirror

Aug 06, 2020


Originally posted on Business Post, 26 July 2020.

Deadweight is what economists call money that is spent to stimulate activity which would have happened anyway.  No need of any such concerns over the July jobs stimulus package announced on Thursday.  The need is so great that any money pumped in by the government in any direction is going to realise some benefit.  The trick now is to maximise it.

Some of the negative responses towards the stimulus package measures look a bit tired and frayed.  The last time we had an emergency stimulus like this was back in May 2011 which brought in the 9% VAT rate for the hospitality sector.  That new 2011 government had been formed in early March, yet it took a full two months to start dealing with the employment crisis prompted by the banking collapse.  Things move faster these days so we need to move on from rear-view mirror economics.  We won’t ever revert to a 2011-style economy but neither can we go back to 2019 methods of doing things.

It is clear that government looked to some international experiences when pulling together the bundle of measures.  Using the tax system to deliver relief works well and has been the pattern in several developed countries.  Extending the temporary wage subsidy scheme, even if it is no longer called that, is effective because of the speed of delivery of relief.  

The Employment Wage Support Scheme now could cover a greater number of people because the employment reference point of 28 February is no longer sacrosanct.  Its duration, extended up to April of next year, provides yet a further reason for employers to hang on to their workforce.  There had been some suggestions that it would morph into an even more effective arrangement modelled on the German Kurzarbeit system where the government pays salary for the unworked time of employees on reduced hours.  

However, the social welfare system in Germany is radically different to ours.  In Germany, almost 40% of a worker's wage goes to the government in social security before any income tax is paid.  In Ireland total PRSI contributions on employment top out at just over 15%.  The Employment Wage Support Scheme in its current shape may be as good as the country can support, because there is zero capacity in the economy to increase taxes in any form.  Every measure in the package needs to be seen in the context of what can be sustained.

Any critiques of the jobs stimulus package based on the notion that things will return to 2019 economic status are misguided.  The business models for tourism, the hospitality sector, the entertainment industry and education have changed fundamentally, and might never revert to pre-coronavirus methods of earnings and delivery.  Take professional training for instance.  The technicians supporting the webcasting of classes and online invigilation of examinations will become just as important in the future as the teachers and exam markers were before coronavirus.  It may well turn out that the best elements of this package will be the restart grants to help businesses remodel their premises and service delivery, and the reskilling and apprenticeship programs.  

The July jobs stimulus is not without its flaws.  Before the crisis, 330,000 citizens in the total workforce of 2.3 million were self-employed.  The pandemic unemployment payment was an unprecedented gesture towards this cohort of workers.  It was the first time that the State had offered the self-employed unemployment support to this extent.  Although it is being extended to April next year the payments are to be tapered back.  The new income tax reliefs to recover tax paid by the self-employed in happier years is a form of grant, but this assumes that their business was well established and profitable before the virus struck.  

Timing is also an issue.  Reducing the VAT rate from 23% to 21% should help retailers manage cash flows, but it could also prompt consumers to delay the purchase of big-ticket items until the cut takes effect in September.  In the past, VAT reductions have been reversed by government in short order because retailers opted to allow the reductions add to their bottom line rather than benefit the customer.  This reduction is time bound, so there is no commercial penalty for not passing on the reduction.

Without consumer confidence the stimulus could yet fail.  People need to be comfortable where they shop, where they eat, where they stay, how the travel and where they socialise.  Re-starting a business is not just about reopening doors.  Just as government looked overseas for ideas, consumers are well aware of the consequences of poorly managed reopening in cities as diverse as Leicester and Barcelona.

We won't know for a while whether the balance between grants and loans is correct, whether we have done too much for employees at the expense of the self-employed, whether the measures can be implemented with sufficient speed and whether they will generate sufficient confidence in the consumer market.  The stimulus measures must be monitored as rigorously as NPHET monitor the impact of public health measures and adjusted as necessary to ensure they are working. 

Just as we are right to be concerned about a second wave of coronavirus infection we cannot afford a second wave of economic collapse.  This collapse can be avoided if we focus forward.  Let’s not try to re-model our economy back to how it looks in the rear-view mirror.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland