Supporting the recovery – a letter to the Minister for Finance

Apr 27, 2020

Originally publised on Business Post, 19 April 2020

Dear Minister

This week you promised to publish a policy response to support the recovery.  You have made the point in the past that while many people have great ideas as to how money should be spent in our economy, few make proposals as to how money might be raised.  In happier times it was relatively straightforward, though never popular, to raise additional taxes. 

But that was then and this is now.  In our now crippled economy where industry is already unable to meet existing tax commitments, what type of measure would bring in an additional €1 billion over twelve months?  Income tax increases? Hardly.  A VAT increase?  Possibly.  But even if it did, how far would €1 billion go towards making a difference in our current downturn when €250 million has already been paid out in Wage Subsidy alone?  Whatever else you include in your recovery policy Minister, tax increases should not feature. 

Many comparisons have been drawn between the downturn in 2008 and our current crisis, but the current dilemma is fundamentally different.  In the past few weeks industry across the world has been put into a government induced coma to help tackle the pandemic.  Compare that to the last time, caused by a global financial collapse.  Interest rates are now much lower than they were at the time of the last recession, and the EU institutions are creating a pool of cheap money that countries can draw on to rebuild shattered economies.  Compare that to the last time when the Troika came to Dublin because, as a nation, we couldn’t borrow money. 

That's not to say that there aren't lessons from the great recession.  You and your officials will be aware that the ballooning of the national debt from 2009 onwards was not primarily due to the bank bailout, but rather to the decisions by the then government to maintain social cohesion by preserving state benefits and public services as best we could until employment levels came back towards more normal and sustainable patterns.  That took seven years of austerity to achieve.  On current evidence we will need to borrow again in 2020, but we must contain the borrowing requirement in future years to avoid a repeat of prolonged austerity.

To do this we should look beyond the models generated of traditional economics and also draw guidance from other disciplines.  The key guidance from accountancy is crystal clear - nothing kills a business quicker than a lack of cash flow.  When businesses disappear, the employment they create also disappears.  If we are to secure business recovery and also to provide a reasonable standard of living for the majority of our citizens, jobs have to be restored and preserved as quickly as possible. 

The wage subsidy scheme directly correlates jobs with business activity.  Even if the wage subsidy scheme has to be extended beyond the current 12-week period using heavy government borrowing, that might be money very well spent.  Restoring employment and income levels will reduce social welfare demands and boost income tax revenue in the years ahead.  In turn that reduces the future borrowing requirement. 

Cash infusions to business will be needed beyond the lifting of Covid-19 restrictions.  Behavioural economics warns that decisions tend to be made in a risk averse way.  People also tend to base their decisions on more recent experience and information even when the experience and information is not objectively correct.  That suggests that there will be considerable hesitancy in the consumer and financial markets for many months to come. 

Purchasing and investment patterns comparable to those of 2019 will not return as long as the horror of the disease and the worry of the lockdown remain in people’s minds.  Short of discovering, and widely deploying, a Covid-19 vaccine it may not be possible to change mind-sets quickly.  Even if confidence rapidly returns to our domestic market, it may not return as soon rapidly to our export markets.  Planning on the basis that all will return to normal post lockdown would be too optimistic.

More positively, the management of the current crisis may be restoring confidence in public services. Rightly or wrongly, there was increasing scepticism in recent times about the capacity of government and the public service to deliver.  There were high profile examples of questionable financial procurement like rural broadband and the National Children’s Hospital. 

However in recent weeks we have seen that the public sector can react quickly and effectively.  There is momentum to carry forward elements of the current response to Covid-19 that think the previously unthinkable - putting more elements of housing, health and insurance directly under public control and flexibly redeploying public servants where they are most needed in service provision, standards maintenance and regulation. 

Minister, the actions by you and your colleagues in this government and the next will not be judged by the electorate on immediate outcomes.  They will be judged by reference to the impact on our daily lives in 2021 and 2022 and beyond.  A return to the type of austerity we experienced following the financial collapse is something the Taoiseach has said is to be avoided.  It can be avoided if the national recovery policy maintains the current emphasis on keeping cash in businesses, empowering the public sector and not expecting a return to normal anytime soon.

 

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