The impact of the Covid-19 economic shock has been so extreme and so sudden that it has been difficult to get to grips with its implications. Accepting that huge uncertainties remain, new reports from the Irish Fiscal Advisory Council (IFAC) and the Economic and Social Research Institute (ESRI) are valuable in trying to see through the fog of what lies ahead.
There are a number of underlying messages. The obvious one is that the recession is the deepest we have seen in Ireland, with the ESRI estimating that gross domestic product could fall by 12 per cent this year.
The IFAC report frames this well by pointing out that the the economic hit is immense, but that it is possible that the economy could return to its pre-crisis levels in two-and-a-half to three years, as opposed to the 11 years it took after the financial crash. It has detailed and informative analysis on what this means for the public finances.
The IFAC gives its blessing to the Government’s fiscal response in providing extraordinary income supports as well as planning assistance for businesses. It is appropriate, it says, to increase spending and borrowing now and also to borrow more to restart the economy after the worst of the crisis is past.
However, there will be a need to reduce the deficit and set the ratio of debt to national income on a downward path thereafter, most probably requiring some tax increases and spending cuts. If the economy is in a growth phase when this happens, then this may be manageable politically, though even then it will not be easy. If the recession is prolonged and followed by a period of slow growth, it will be all the more challenging. The ESRI presents calculations underlining the importance of ongoing European Central Bank support in the markets to allow Ireland to continue to borrow at current interest rates.
Both reports outline more pessimistic scenarios where a return of the virus leads to further closures and increases the economic cost. In this scenario the ESRI estimates that GDP could fall by 17 per cent this year and unemployment could average not far off one in five of the labour force. The IFAC warns of the risk in a worst-case scenario that the banks might again need State cash. However, it feels on balance that austerity may be avoided.
There is a lot to be done. The ESRI has carried out useful work on the exposure of younger people, in particular, in the jobs market and this presents a big policy challenge. So does helping the tens of thousands of SMEs, where the institute argues that more cash grants may be needed.
There is much to chew on here for those involved in the talks on forming a new government. In times like this, politics is a difficult business. But it is also in such circumstances that it can make a very big difference.