Only fix for Covid deficit will be jobs-rich recovery

David Chance

Recovery: Ireland’s budget has performed better than expected during the Covid crisis

April 29 2021 02:30 AM

Mixed messages on vaccinations and on-off lockdowns have slowed Ireland’s recovery from Covid, but the budget has performed, and delivered, far better than expected.

A year ago, the now Tánaiste Leo Varadkar was saying he didn’t want to be “the European country that has the highest deficit as well as pretty big debt, because if things change, we’ll be the one picked on first” by financial markets.

It is not surprising that less than a decade after the financial crisis, the scars of being cut off from access to the financial markets were raw.

Mr Varadkar said the Government’s aim was “to be in the middle of the pack when compared to our eurozone peers”.

An analysis of the latest debt numbers from European statistics agency Eurostat shows that Ireland has substantially outperformed that target while at the same time managing to deliver €7bn in Pandemic Unemployment Payments to 850,000 people as jobless numbers surged to a record 30pc of the workforce.

If you look at the increase in public debt in Ireland, it was the smallest in the eurozone at 2.2 percentage points of gross domestic product (GDP) – a figure that stacks up against 14.1 percentage point rise for the bloc as a whole and 25.1pc in Greece, once again the worst in class.

Of course, a lot of that is driven by the well-known distortions in Irish GDP numbers that overstate the size of the economy. The official data tells you that Irish GDP rose by 3.8pc last year – whereas a truer state of the economy shows demand plunged by 5.4pc. But GDP is what investors look at.

The most indebted eurozone countries saw liabilities surge as a result of the economic collapse, especially in southern Europe, while in the likes of Germany, which had low debts to start with, the rise was driven by increased spending.

If you use a measure that strips out the distortions here and look at the ratio of debt to modified gross national income (GNI*), it rose by 12 percentage points last year to 108pc of GNI*.

Even on this measure, Ireland’s finances have performed relatively well – France, for example, saw its debt-to-GDP ratio rise by 18.1 percentage points to 115.7pc.

In other words, Ireland is not an outlier in terms of debt among its eurozone peers and there is no need for any austerity to avert a market collapse.

Ireland’s debt costs are set to decline further this year, to just 1pc of GDP from 2.6pc of GDP in 2015, when debts were €17bn lower than they are today.

Governments have learned that they can now live with elevated levels of public debt, thanks in part to low interest rates, but also due to favourable nominal growth dynamics, something Ireland has experienced since the end of the financial crisis. This is the key to creating jobs and also the path to a sustainable budget.

Unemployment will be over 16pc this year and more than 8pc in 2022.

Given that the deficit is expected to fall once people return to work and exit income supports and that the State has raised half the money needed to finance this year’s shortfall, it is time to think beyond crisis policies.

“The key to fixing the public finances is to restore employment levels,” says Tom McDonnell of the Nevin Economic Research Institute.

“The Irish Government can and should seek to avail of the low-interest environment in order to fund a multi-billion stimulus programme based on investment in infrastructure and measures to support the zero carbon transition,” he wrote in the institute’s most recent economic analysis.