A STRONG COUNTER-CYCLICAL BUDGET TOTALLY APPROPRIATE
In Budget 2020, Paschal Donohue adopted a pretty conservative approach to the public finances despite the fact that it was the last budget before the general election. In the aftermath of that election in February, I heard a number of bruised and battered Fine Gael voters lament and even criticise his approach, but I think history has already shown that he adopted the correct one. A year ago, the economy was growing strongly and a budget surplus, albeit a small one, was most appropriate in the circumstances. Fiscal policy should be counter-cyclical if at all possible, and 2019 certainly was not a year for an injection of fiscal stimulus. On the contrary, 2020 and 2021 are most definitely years for a strong injection of fiscal stimulus and that is exactly what we were treated to yesterday. Budget 2021 is an example of a sensible and most appropriate counter-cyclical fiscal strategy.
The run up to Budget 2021 was challenging and unusual. The challenges emanated from the ongoing havoc that COVID-19 is wreaking on the economy and the public finances; and the very real threat that Brexit now poses. Unusually, yesterday’s budget offering was the third part of the ‘2020 fiscal trilogy’. In March, there was a significant fiscal stimulus in the shape of the various COVID-related employment supports, and then the July stimulus package. It is unlikely that a fourth one will be required in 2020, but that may not be the case in 2021.
Budget 2021 was sensibly predicated on two assumptions – namely, that from the beginning of 2021, bi-lateral trade with the UK will be conducted on the basis of World Trade Organisation (WTO) terms; and secondly, a widespread vaccine will not be available. Both of these assumptions are credible based on what we currently understand, but of course both could turn out better than expected. Given just how influential both of these issues will be for the trajectory of the economy and the public finances over the next couple of years, it is sensible and prudent to plan for the worst and hope for the best.
Budget 2021 is the most expansionary budgetary package introduced in the history of the state, totalling €17.7 billion. Unlike Irish fiscal policy in my living memory, this year’s budget is sensibly very counter-cyclical, and it stands out in marked contrast to policy in the aftermath of the banking crash over a decade ago.
The Government is set to run a budget deficit of around €21.6 billion this year, and following the spending and taxation measures announced yesterday, a deficit of around €20.5 billion is projected for 2021. These are big borrowing numbers that will add significantly to the level of outstanding national debt. However, in the face of the pandemic, there is no other choice. The tax measures and the very significant increase in public expenditure contained in the budget are aimed at sustaining businesses and households that are in serious difficulty due to the evolving restrictive measures put in place to deal with the virus. There is no option other than to increase spending significantly in the Department of Employment Affairs and Social Protection, and the Department of Health in particular. There is also no option other than to use taxation and expenditure to support those sectors and those households most adversely affected by the crisis, and the potential pressures that could emanate from a bad Brexit.
In an environment where long-term bond yields are close to zero as a result of the bond buying programme of the ECB; where the EU has relaxed its fiscal rules; and where the International Monetary Fund (IMF) is strongly advocating capital spending and investment in infrastructure, the Irish Government is correct in borrowing heavily to sustain the Irish economy and Irish society for as long as it takes. Thankfully, bond markets are not overly concerned, because virtually every country in the world is doing what Ireland is doing.
The appropriate response to the COVID crisis is to ensure that a functioning economy is maintained, and that the foundations for an eventual economic recovery are laid. A resumption of economic growth would result in a cyclical reduction in government borrowing and debt, so it is important to ensure that we do whatever it takes to guarantee such an economic recovery. In the face of or indeed in the aftermath of this crisis, fiscal austerity would not be an appropriate response from a social or economic perspective. Of course, it goes without saying that Government does need to be vigilant in terms of how the money is spent, because history should show us that merely throwing money at a problem does not necessarily solve it. It is also important to remember that much of the money spent will find its way back into the economy through wages and consumer spending, and thereby support employment and tax revenue buoyancy.
The economic assumptions underlying the budget look sensible and appropriate based on what we know now, but the level of uncertainty is currently elevated to a degree that we have never seen before. Anything is still possible over the coming months, and the good thing is that there is a level of flexibility built in that will allow Government respond to whatever might arise. The already very pressurised motor industry will justifiably have most to complain about after this budget, but for all other sectors it looks reasonable, if one accepts that scarce resources must be allocated in the best manner possible.
Budget 2021 is all about COVID-19, Brexit, housing, health, and the climate. In overall terms, Budget 2021 is a very expansionary and counter-cyclical budget that is totally dominated by the COVID-19 crisis, and the possibility of a no-deal Brexit. It is an appropriate strategy in current circumstances, but this is an evolving situation and clearly Government will have to remain very hands on in terms of management of the economy for at least the next 15 months.