Cliff Taylor: Winding down Covid economic subsidies will be a treacheous task

Dec 11, 2021

The decision to introduce massive supports for the economy and families as Covid-19 hit in 2020 was a pivotal one – but it was correct and, once the principles were agreed, reasonably straightforward.

But withdrawing these supports is going to be a heck of a lot more complicated, as we saw this week. Minister for Finance Paschal Donohoe said that the businesses relying on supports faced a “moment of risk” next year as they were wound down. But so does the Government if it gets this one wrong. And with the path of the pandemic uncertain, this is going to be very tricky.

We got another glimpse of the complications this week, when the Government initially said that the wage subsidy scheme for employers would continue to be wound down and other special supports put in place to support the worst-affected sectors. In theory this made some sense.

But in practice it wasn’t possible to design a new approach quickly enough. It was proof of the age-old rule – once a Government support is introduced, doing away with it is never easy. And it is just a taste of what is to come.

What happens now if the pandemic drags on, as looks very likely?

For now, the wage subsidy scheme will be extended at current rates for another two months, until the end of January.

With a fair chance that the latest restrictions will be extended beyond their current expiry date of January 9th, the Government will face the same decision again – keep payments at current rates or come up with some new support plan.

Already businesses are asking what happens next? With the working assumption that the pandemic would be easing down in the early part of next year now upended, this signals a much wider issue.

Emergency measure

The Government has spent the guts of €20 billion on the various schemes supporting the economy. This level of support has worked as an emergency measure. It was never sustainable in the long term.

But what happens now if the pandemic drags on, as looks very likely? This sets up big decisions early next year over the wage subsidy scheme, due to be wound down and be gone by April; the pandemic unemployment payment, due to phase out finally by the end of March, and the other supports.

With not far off 300,000 jobs still supported by wage subsidies, you can see why Donohoe’s moment of risk could arrive for many companies. For some it will be a “moment of truth”.

And the Government will know that its decision on supports will be vital in the equation, and will have to balance this against what is happening in the pandemic. At some stage the calls will have to be made. Thumbs up or thumbs down. The stuff of political nightmares.

Rolling restrictions carry a huge health and social costs and also a big economic price

The economic argument is that you cannot spend money keeping unviable businesses on life support – and the long-term change in the way we live our lives and how and where we spend is going to be a big issue for many firms. Some old business models simply won’t work any more. But the politics of this – as we saw this week – will be very pressurised.

There are longer-term questions here too. Do we need a system to help companies hitting short-term problems, as exists in countries such as Germany, and more supports for people losing jobs?

The Covid-19 crisis will place these choices and the idea of a wider social safety net on the national menu, but paying for this would require new revenues, most likely significantly higher PRSI payments from both employers and employees. This is a job for the Government commission on tax and welfare, due to report next summer, to scope out. Budget 2023 could be a very interesting one.

There are pluses. We head towards a crucial year with the public finances and the jobs market in much better shape than anyone would have expected. Many companies, given any kind of fair wind, will be able to survive without supports.

Ironically, one of the issues with the wage subsidy scheme for the Government is that some companies are drawing them down while at the same time giving employees wage increases. State funding via subsidies of higher wages clearly makes no sense in the long term – but you can see why businesses in what Ibec has called the tightest labour market since the early 2000s would do so.

Huge leeway

Getting the balance right here will be really difficult for the Government. ECB policy, which has given the Government huge leeway to borrow and fund supports in the last two years, is likely to start to change next year. Even if there is no increase in interest rates, support for Government bond buying will reduce.

Borrowing rates should still remain low, but Ireland won’t be borrowing at zero interest rates for much longer. If current rates of inflation do not ease as central banks expect, then nerves will get frayed.

The economic outlook is always uncertain, but the pandemic has brought this to a new level. We can hope for a better 2022 as booster numbers rise and new anti-viral drugs enter the equation.But we need a plan – and not on the basis that we wait for the fifth and sixth waves to force us to close parts of the economy yet again.

All the possible strategies for trying to avoid or minimise this are around in discussion –antigen tests, ventilation, boosters, proper mask wearing and so on, but in some areas the Government has been slow to act, hoping that vaccination would do the job and early 2022 would see the pandemic fizzling out.

Rolling restrictions carry a huge health and social costs and also a big economic price. We need to work to allow businesses to operate as much as possible and reduce reliance on State support. In terms of economic policy, we are heading for the really tricky bit.

Related Posts