The 2021 Budget will be extraordinary and it could be transformative. It will push the country into even higher debt - with the state spending much, much more than its tax revenue. It should be pivotal. This Budget should be used to decisively address the big issues facing us: - climate repair, the two-tier health service, housing and thus much inequality.
There is broad consensus that these are the key issues which must be addressed in Ireland. With this consensus backing it, the government can borrow more - whatever it takes - to solve these problems. This is a remarkable time. It is 100 years since the last world pandemic with the Spanish flu from 1918. Covid19 has already radically changed the world. The pandemic has been a catalyst for change. It is a crisis which should be harnessed for pivotal change.
Our Current Economic Reality
All the world's economies have been partially closed down, with sectors being transformed. The role of the state in the market has increased massively. For decades, the idea prevailed that the market can deliver almost everything, that everything be monetised, privatised and that the state be shrunk to the minimum. This idea was exposed by the 2008 Crash but it has arisen again. This time it is different. The state is in charge so much that its power must be carefully monitored.
The Irish government's economic response has been remarkable. Especially so for the conservative caretaker government. Its first action was a massive injection of public money into wage subsidy schemes. It was exactly the right thing to do and it showed that when challenged, in spite of its conservatism, it did the right thing. It also largely ignored the populist calls by some to pour money in unconditional grants into businesses. The result would have been large socialised losses without any change.
A Budget Unlike Any Other
The government has set out its plans for the budget. The strategy is reasonable and the government highlights the major issues: "As per the Programme for Government, the sectoral priorities will be Health, Housing and Climate change." But based on its previous performance it clearly lacks the ambition to do anything meaningful in relation to them.
The government is planning for a budget deficit in the region 4.5 - 5.5 per cent of GDP and "this includes continued substantial COVID-related expenditure, albeit not at the same level as this year. This equates to ‘cash’ borrowing in the region €15-19 billion for next year. Additional policy decisions – to be announced on Budget day – will add to this." This is fine but with the crisis and interest rates at zero and even below for some recent Irish borrowing, it is a missed opportunity to "make Ireland great" by ending the longstanding housing issue, two-tier health service and climate damage.
There was an Exchequer deficit of €9.4bn to end-September 2020, compared to a surplus of €38 million in the same period last year. This collapse in the balance is mainly due to a massive Keynesian-style increase in expenditure due to the once-in-a-100-year pandemic. Tax revenues were down, but not by as much as might be expected as most sectors are surviving and some are doing well.
Total spending to end-September, at €48,126 million. It was "was ahead of profile by €9,595 million, or 24.9%, in year-end terms, made up by a 25.9% increase in current and a 16.9% increase in capital spending."
Benefits of the Keynesian Approach
In its study of Public Investment for Recovery (October) the IMF found that "Increasing public investment by 1 percent of GDP could strengthen confidence in the recovery and boost GDP by 2.7 percent." This boost would also boost "private investment by 10 percent, and employment by 1.2 percent if investments are of high quality." Thus it is clear that the government should be courageous and visionary and borrow even more to spend on their key issues. It should do what it takes.
IMF argues that public investment in health, in social housing, in digitisation and climate repair are good investments in this pandemic. Finally, the IMF, not a radical body, also found that "because rates of return on investment in adaption for climate change are often greater than 100%," such investment for such adaption is "an effective use of public money."
When the government is dealing with an episode that only happens every hundred years, then its approach must be strong and visionary. This is a good time and a cheap time to borrow and the returns will be highly productive, especially in countering the big impact on the economy of COVID-19.
In countering the Pandemic, the government took decisive and radical action on the economy because it had to. It was counter to its conservative ideology. What is now required is visionary and exemplary action which will transform Ireland's housing, health and climate issues. By such major reform, it could mean that the pandemic had a golden lining.
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.