LAST Thursday's July Measures, the latest instalment in the Government's response to the Covid downturn, comprise mainly time extensions to schemes already in place. The crisis is not V-shaped, is not going away and the time extensions make sense.
The significant new measures, operative from September, are the two-point reduction in the 23pc VAT rate, the €125 rebate for taxpayers who spend €625 in Ireland on accommodation or food, a credit guarantee scheme and a laundry list of capital projects adding up to €500m.
The 23pc rate is the most important of the six rates operative in Ireland - just over half of all sales by value are taxed at this highest rate, and it gathers around 70pc of all VAT revenue. Unfortunately for a jobs stimulus package, it is in large degree a tax on imports. The items covered include cars, petrol and diesel, Champagne, audio-visual equipment, car parts and accessories, computers, cosmetics, fridges, jewellery, machinery, office equipment, tobacco and kitchen appliances. We do not make cars in Ireland and we do not make TV sets. There are people growing all sorts of strange stuff in remote locations on which VAT cannot readily be levied but we do not grow tobacco. We do not produce petrol or diesel either - indeed, you can no longer get a licence to drill for the stuff.
If prices fall by 2pc, this will save you about €1,000 on a mid-range Merc, if you fancy creating some jobs in Germany. With the €125 saving on the staycation rebate scheme, you could pick up three bottles of Pol Roger, and they need jobs in France too. You get the drift - the reduction in the top VAT rate is a horse designed by a committee, unlikely to create jobs in Ireland.
On the €125 winter staycation subsidy, I agree with Sinn Féin. People who do not have regular income on which they pay taxes and can claim the rebate are excluded from this munificence, and it is fair to describe it as a subsidy to the Dublin middle classes. This manoeuvre is biased against lower-income citizens. The Dublin middle classes are decent upstanding people whoever they vote for, but they should pay for their own winter holidays.
This is a cockeyed substitute for a ridiculous demand from the hotel trade. The Government was right to resist the demand to cut their concessionary VAT rate from 13.5pc, way below the standard rate which everyone pays on most consumer spending. The last and pointless cut to 9pc made no difference and took five years to reverse. The permanent government in Merrion Street have long memories, Deo Volente.
The overall package will bring the budget deficit to about €30bn for 2020, according to Minister for Finance Paschal Donohoe. At the end of last year, when a small surplus was being projected to shave a little off the accumulated debt, the figure had reached about €204bn. Instead of falling a little, it will exceed €230bn by December on the minister's reckoning.
The import of the July Measures package is that any hope that extra borrowing will not be needed in 2021 has now been abandoned and there will be another substantial deficit next year. This is realistic but it means that the end-2021 debt figure could be €240bn, or €250bn, even with some economic recovery and a tapering of the spending commitments.
The scale of the fiscal response is unprecedented and quite unlike what happened after the 2008 financial crash. On that occasion, the Irish authorities felt that, to preserve the capacity to borrow, the deficit could not be permitted to balloon. They cut back on spending plans and imposed tax increases, consciously deflating an economy in recession, and not following the advice of the macroeconomics textbooks.
But the government knew that we were on our own, that just a few EU countries had similar problems and that the European Central Bank was unsympathetic. The government, swamped by the sheer scale of the banking disaster, ended up unable to borrow and in an IMF programme. Countries which have abolished their own currencies lose the ability to finance government independently, a point apparently lost to this day even on some practising economists.
This time round, every European country is facing big deficits and the ECB is acting like a proper central bank and no longer in lecturing mode. It has agreed to backstop the sovereign bond markets of each member state and will buy government bonds to cap the interest rates governments have to pay.
The Government can load up on extra debt without great cost but will be unable to do so should the ECB reverse engines at some stage, as inevitably it will. Whenever it does, the countries with heavy debts, including Ireland, will feel the breeze first.
If the experience of the last downturn is a guide, one of the priorities for this government, allowing for the slippage to soft options which is the cost of democracy as practised in these parts, should be the avoidance of a slash-and-burn on the capital programme.
As one of the participants in those events over 2009 to 2011, it is a personal regret that the capital programme was cut too much, with rubbish removed but better projects given the same treatment. Those who care about the long view did not fight hard enough to protect the public capital programme.
The new Minister for Public Expenditure, Michael McGrath, appears to understand this and committed last Thursday to preserving the capital envelope for 2021. Unfortunately, on his first day in office, he announced a 2pc pay increase for all public servants, full-year cost about €260m per annum.
Over the lifetime of the new Government, if it lasts four years, this decision precludes a billion of capital investment unless you believe in Sinn Féin's Magic Money Tree. That equates, for example, with the estimated cost of the Bus Connects project. Straight up, who believes that an extra few bob for public officials, none of whom face redundancy or pay cuts, is a bigger priority than a long-overdue upgrade for Dublin's bus system? To proceed on the basis that you favour both the extra few quid for the public service and a better bus system in the capital is kindergarten economics.
The medium-term plan due on budget day will be the real test of seriousness for this Government. It should protect the capital programme, refocus the emergency interventions on the sectors at risk, and quit pretending that there is magic money.