High-risk route to recovery if future leaders don't err on side of caution

The Covid-19 pandemic is now dealing a serious blow to the economy (which may yet be compounded by a no-trade deal Brexit). Yet Fianna Fail, Fine Gael and the Greens are promising major investment in health, housing, transport and climate action while not increasing taxes or cutting welfare.

The IFAC is once more sounding the alarm bells. Its chairman, Sebastian Barnes, who was appointed earlier this year, told the Sunday Independent: "I think it is risky to make these commitments without knowing what the whole picture is going to look like and it may complicate the hard fiscal choices that need to be made in the coming years."

He said the State is now facing the "most dramatic" recession in its history and, although reluctant to engage in the language of condemnation, he did criticise the three parties ruling out so many revenue-raising measures as "premature".

"They're going to be faced with a higher rate of unemployment, a higher level of public debt," Mr Barnes said. "In that context, making commitments to taking large sections of tax or spending off the table is going to make it very hard to reach a good balance between the ambition on the spending side and what people want to do on tax."

He is not the only one. As the crisis has unfolded it has become apparent that the economy will not recover as quickly as had been hoped. Businesses will struggle to reopen while adhering to public health and strict new workplace guidelines. The tourism and hospitality sector has been crushed, and tax revenues are collapsing at an alarming rate. Department of Finance officials are "increasingly frustrated", according to one source, that this economic reality does not align with promises being made by the parties trying to form a government. "Two completely different worlds," the source said. "The big job of the next government will be economic recovery and everything else will come secondary to that."

The main concern is how to wean people off the €350-a-week pandemic unemployment payment (PUP) and the temporary wage subsidy scheme (TWSS). The Parliamentary Budget Office warned last week that €4bn on these measures alone has yet to be spent.

With the two schemes due to expire next month, officials are examining alternatives. Both will likely be extended until August at least but with some modifications as the country starts to reopen. One of the options being looked at is transitioning as many people as possible onto the TWSS as they return to work. "It's a more flexible scheme because it can be varied up and down according to salary. It's much less of a blunt instrument than the pandemic payment," a source said. But for other sectors, like tourism and hospitality, it will be more difficult which is why an employee activation scheme will likely be rolled out where people keep their PUP subject to reskilling or retraining. "There won't be a cliff edge. There will have to be an unwinding of these things with a more flexible and targeted scheme with the policy of getting people back into work. But all of that's going to be really expensive," the source added.

The Government has already committed to spending over €13bn more than anticipated this year to fund emergency measures for workers, businesses and the HSE. But that is only up to June, so the cost will rise by billions more.

Paying for this will be funded by borrowing in the first instance but will eventually require hard fiscal choices. Mr Barnes said Ireland had seen the cost of operating unsustainable fiscal policy in the past and also raised specific warnings about "the State's over-reliance on corporation tax, which can't be sustained forever".

He is concerned by the commitment from Fianna Fail leader Micheal Martin (and supported by the Greens) to scrap the planned increase in the pension age to 67 next year, saying it is "very risky and may well complicate life down the road".

"Not increasing the pension age by a year costs €600m a year, and that cost will increase as more people reach retirement age," he said.

Some figures in Fine Gael and Fianna Fail privately believe the pledge in their joint framework not to increase income tax may not be sustainable over the next five years.

Mr Barnes concurs but highlighted the scope to increase property and inheritance taxes, rather than levies on labour. "Those kinds of taxes on wealth are areas that many countries are looking at. I think there's renewed interest partly as wealth inequality has gone up, partly as governments need to raise more revenue."

While he cautioned that the IFAC does not make policy recommendations, he said major spending commitments on policies like Slaintecare will require revenue-raising measures.

"There is a risk that they won't do quite enough to have enough of a budget balance, that they'll prefer to increase spending or cut taxes but not balance the two and then eventually that will mean the debt will stay higher. For a country like Ireland, that's a very risky position to be in."