In mid-March, on introduction of the dramatic measures to contain the spread of Covid-19, Insider remarked that while the health aspects of the crisis would dominate the initial phase of the crisis, in the long run, this would go down as an economic crisis.
Two months on, and while the tide is starting to turn, he is still a little surprised at how many people (including, worryingly, some in senior positions who should know better ) are in denial about the scale of the crisis.
Comparisons with the Great Recession of 2008/9 seem hopelessly optimistic. What we witnessed a decade ago, notwithstanding severe pain for those exposed to property in particular, was a sharp and sudden downturn to which people adjusted.
What we are currently witnessing is a complete shutdown of large tranches of the economy, and reopening parts of it will prove very challenging. Exacerbating this is the large shutdown of society, with sports and the arts badly hit. And on top of it all, Brexit 'hasn’t gone away you know!'
An uneven hit
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The economic impact will be felt across society, but it is likely to be particularly felt among certain demographics and regions. Ten years ago, the construction industry was the big casualty, this time tourism and hospitality will be front and centre. This will be particularly problematic along the western seaboard. The contribution of TDs from Kerry in last week’s Dáil debate was particularly sobering - the remark by Sinn Féin’s Patrick Daly that Kerry County Council had held emergency talks to discuss the danger of impending insolvency standing out.
'What concerns Insider is that politicians from across the political spectrum are, willfully or otherwise, hiding the scale of the crisis from the public'
Low-paid workers have been heavily impacted in the first phase of the crisis, making up both a large section of those laid off, but also of those who are working in parts of the services sector which have remained open. The importance of low-paid workers has been eye-opening for many and, for Insider, the fact it has been so eye-opening is itself eye-opening. Talk of an out of touch elite invokes allegations of Trumpism, but it is not totally without foundation.
The political response
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The initial political response was strong, with Finance Minister Paschal Donohoe seeming on top of his brief. The introduction of the emergency social welfare and job subsidy schemes at very short notice was impressive. This however only bought time and that time is now running out.
What concerns Insider is that politicians from across the political spectrum are, willfully or otherwise, hiding the scale of the crisis from the public, painting a rosy picture and making pledges of no pain to come that are unsustainable. The fact that efforts are simultaneously being made to form a government exacerbates this; the recent joint document from FF and FG promises all things to all men (and women ) and the strategy of both parties seems to be to promise to the smaller parties whatever it takes for them to join them in coalition.
Unsustainable promises
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No tax increases, no cuts to social welfare payments, nor to the public pay bill. These will all be popular pledges but if implemented this leaves little scope to reduce the huge deficit in the public finances that will result from the crisis.
Essentially then the plan is to borrow our way out of the crisis. As things stand, this is not so outrageous – to a degree. One welcome difference to the crisis from 10 years ago is that the State’s credit rating is strong and, so far, the onset of this crisis does not seem to have impacted on it.
'We may see increases to PRSI, technically not a tax hike but, to the average worker, will still mean the money is jingling in someone else’s pocket'
Indeed, the State quietly raised several billion euros on a number of occasions in recent weeks at very low, or even negative interest rates. As we discovered in 2010 however, sentiment can quickly change. The role of the European Central Bank will be pivotal, but so too would any sense that Ireland was taking on the persona of a drunken sailor. In reality the Government, regardless of composition, will be forced to take some unpopular measures.
Possible measures
What might these entail? Insider sees two scenarios – one will be a breach of the pledges made and the other will be cuts to capital expenditure.
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In terms of tax hikes, top of Insider’s ‘Ones to Watch’ list would be VAT. This has long been a favourite area for governments looking to raise funds in a crisis, or to fund income tax cuts in better times. It is also one of the easier ones to introduce without political resistance.
If we think back to the FG/Labour government’s first Budget in 2011, the standard rate of VAT was increased from 21 per cent to 23 per cent. This measure raised more than €400 million, almost three times as much as the Household Charge introduced in the same Budget. All of the controversy was, however, focused on the latter, and this despite the fact that VAT has long been recognised as something of a regressive tax, having a particular impact on the budgets of low-spending families.
We may also see increases to PRSI which technically will not represent a tax hike but, to the average worker, will still mean the money is jingling in someone else’s pocket.
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The other area that is particularly vulnerable however is capital expenditure. Politically this is often the least controversial as its impact is long-term. At a local level, the debate over whether the outer city bypass or alternative transport measures should be funded can scale down. It is unlikely either will get anywhere over the next few years.
'Many Green Party policies would prove contentious at the best of times, but, will be particularly difficult to introduce during a recession'
Another area where Insider hears sirens blaring is housing. Here there is a danger of a lethal combination of factors coming to pass that will see us repeat the cycle of the last decade. A weak economy generally leads to a reduction in demand for housing (already we have seen the numbers of homeless people fall ) which in turn will give the Government cover to cut spending in that area, which in turn will lead to an even greater housing crisis when the economy eventually recovers. Insider would ask all politicians (and he suspects we will be getting a chance to question all of them on our doorsteps in the next few weeks or months ) if they really want to repeat these mistakes.
Green conundrum
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Notwithstanding that Insider still expects a second General Election this summer, it would be remiss not to touch on the efforts to form a government, in particular the involvement of the Green Party. It must feel utterly jinxed, having joined government just as the Great Recession was on our doorsteps in 2007, and now being asked to join again at a time of heightened crisis - although at least on this occasion they are forewarned. It has been remarked that, from a tactical perspective they are in a Catch 22 position but, even ignoring that and looking at it from a policy perspective the same is true, both for the party and its putative coalition partners.
'It cannot all be bad news however. We are going to see some support measures introduced to enable businesses to get back on their feet'
Many Green Party policies would prove contentious and require explaining to large sections of the electorate at the best of times, but, they will be particularly difficult to introduce during a recession - eg, carbon taxes. In order for this to fly with the public (and the Greens acknowledge this ) such taxes have to be seen as replacing other taxes, as opposed to being merely a revenue-raising measure. This will be especially difficult in a recession where, at best, the government could leave other taxes unchanged while putting up carbon tax. This could be fatal to the Green message, but also poses risks to both FF and FG and Insider wonders if those parties would be better off talking to Sinn Féin and the various independents.
Support measures
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It cannot all be bad news however. We are going to see some support measures introduced to enable businesses to get back on their feet. The input of multinationals (such as those medical devices and pharmaceutical companies is Galway ) is of course welcome, but the small and medium enterprises that are the backbone of the economy outside the cities have been neglected over the years.
'The biggest contribution that can be made to avoid having a deep recession turn into a full blown depression, is to get things open again'
Last week, the Government introduced a number of measures in the area of tax deferrals and loan supports. We are likely to see some industry-specific measures introduced for vulnerable sectors in the coming weeks. However, the biggest support the State could give is to work closely with businesses to work out a roadmap to reopening, not just in terms of the target dates announced recently, but to address the practical problems many will face in enforcing social distancing measures.
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Business itself also needs to step up to the plate and start putting plans in place in this regard and working with Government; thankfully, we have seen some examples of this in the past week or two from the likes of hairdressers, restaurateurs, and publicans. Ultimately, the biggest contribution that can be made to avoid having a deep recession turn into a full blown depression, is to get things open again and for trade to pick up.
A hopeful note
Finally, a hopeful note to finish on. We have heard regular comparisons with the Spanish Flu pandemic of 1918. This is something that features surprisingly little in the history books but Insider would note that in this country that period was overshadowed by other events and that the years after 1918, far from seeing the country shut down were quite busy! Perhaps we should take note as we face our own challenges now.
