After the rhetoric and promises of the government framework document produced by Fianna Fáil and Fine Gael this week will come the reality check of the revised economic forecasts submitted to Brussels by the Government. The soberly titled Stability Programme Update (SPU) – the document which will go to Brussels next week – will highlight the tough job which lies ahead of the next government in managing the public finances.
The numbers in this will be pretty shocking. Borrowing could rise to 8 per cent of national income this year – or more if the restrictions drag on. Unemployment could finish the year in the 12-15 per cent range, having peaked way higher. Pick your number for the fall in gross domestic product in the second quarter of the year.
So how do we put this in perspective? While we have seen evidence of the huge extent of the early economic hit in the last few weeks, the key economic issue is still the same as it was when this all started. How long will this go on? If we are indeed looking at a gradual lifting of restrictions over the summer and the economy can slowly get going over the rest of the year, then it is probably manageable, albeit at a significant cost to the State and to many households and companies. If instead the restrictions drag on, or there is a series of openings-up and shutting-downs, or we start to see problems in the financial markets or the banks, then it will be much more difficult.
Who knows? I can only admire the honesty of Jonathan Pruzan, the chief financial officer at Morgan Stanley, who said in a briefing this week that "the range of potential outcomes is the widest I've seen in quite some time in terms of what is going to happen in the future".
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The economy – and our public finances – can probably handle the initial impact of all this. The economy is in better shape than when the last two major recessions hit, as Robert Watt, secretary general of the Department of Public Expenditure and Reform pointed out in a presentation on Friday, with lower household and business debts. Measures taken in recent years to strengthen bank balance sheets and restrict the amount mortgage holders could borrow should help.
Low interest rates
That said, the national debt is still more than €200 billion. Our debt was 25 per cent of GDP when we entered the last crisis in 2008, but is now more than 66 per cent – and is close to 100 per cent of gross national income, the measure which excludes the distorting impact of the multinational sector. The saving grace here is the rock-bottom interest rates at which we have raised debt over recent years, and continue to do so. This has gradually brought down the cost of servicing the debt – this costs about 4 per cent of tax revenue now compared to twice that in 2010 and over 12 per cent at the peak of the last crisis.
So we have some headroom, even if adding say €30 billion to our €200 billion in debt over the next 18 months is far from ideal. It will be a balancing act. For now, the vital factor, as Watt referred to, is to move quickly as the Government has done in putting in place income supports. The worry is that further measures, including vital business credit supports, may be difficult to move on before a new government is formed and new legislation can be passed. A way needs to be found to get this done.
After that, some realism is needed about the next few years. We can’t pretend, either, that we can just borrow ever-greater amounts and keep pushing up spending. There is a limit – a constraint, especially with an outstanding debt of €200 billion. Massive European Central Bank support to allow us borrow at very low interest rates will not continue forever. Ireland has a good reputation among lenders but make no mistake, if the ECB were not in the market then the costs of borrowing would already be on the rise.
Emergency measures
This is the really difficult economic balancing act which will face the next government. It will have to oversee whatever emergency measures are needed, involving scary amounts of money, and then start to withdraw them, or most of them in any case.
And then it will to manage a gradual reduction in borrowing in the years ahead – assuming economic growth returns it will do some of the work, but there will be tough choices to be faced on tax and spending too.The framework document for the next government published after talks between Fine Gael and Fianna Fáil failed to address this in any real way. Indeed it flagged a further expansion of the State beyond the emergency measures and major additional spending in health, welfare, education, housing and so on.
Already, getting out of the crisis in one piece is going to cost us a bag of money.The tax base will take a heavy hit. The new government will face tough calls in relation to financing the crisis and its aftermath, never mind how future plans will be paid for. It will be interesting to see how the promised national recovery plan deals with this.
There are, of course, ways of paying for things in the years ahead.There are plenty of tax and spending options, but none of them are easy. What we can’t do is pretend the magic money tree – in Dublin, Brussels or Frankfurt – will keep paying the bill indefinitely. The new government needs to be formed by parties committed to facing the delicate and dangerous balancing act that lies ahead.