The 2021 budget will be the first time in a generation that a recession is not followed by tax increases, spending cuts or the total closure of financial gates.
There is a broad consensus, the right and affordable answer to the economic wreckage caused by the pandemic and the stalemate is to spend the way out of it with borrowed money.
This is the line pushed by Finance Minister Paschal Donohoe and Public Expenditure Minister Michael McGrath yesterday, and was immediately backed by a pre-Budget letter from Central Bank Governor Gabriel Makhlouf and reinforced by today’s advice from the Fiscal Advisory Council.
No one in general would accuse the Central Bank or the Fiscal Council of being the first in the bar for a big round.
But Fiscal Advisory Council chairman Sebastian Barnes says the twin threats of Covid and Brexit justify a “substantial multi-year stimulus package” to continue supporting wages, retraining schemes and other costs more than taxing in order to support request for support even after the current friend has passed.
Barnes is clear though the extra costs should be temporary and not make permanent commitments – one-off retro-assembly puts money into the economy and makes energy-efficient buildings while adding classrooms means hiring staff. permanent teaching.
The Fiscal Council did not say how much additional spending should occur in addition to providing a free 10 billion lek guide, but approved the July 7 billion stimulus package – especially the cash element – as on track.
In a similar tone, the central bank governor’s pre-budget letter gave ministers a green light to keep large-scale borrowing and spending next year, though just as the Fiscal Council was careful to include a reminder that at some point the debt should start to come down
“Increasing the public deficit and debt ratios has been guaranteed and necessary, but eventually a path to lower and more stable levels will have to be followed,” Mr Makhlouf wrote.
The old line, “We are all Keynesians now” – variously attributed to economist Milton Friedman and US President Richard Nixon – has real currency in this crisis.
No one was inclined by the temperament towards Keynes’s idea to use the public purse to introduce the economy when private demand weakened.
Nor do I doubt that Pashall Donohoe is deep down. The minister is a willing consumer who would rather see the Irish shift to the tide of a growing global economy, as happened in 2014, and revived by foreign direct investment drawn into the course of the global recovery than a bill coming out. great for Merrion Street
But the weight of expert advice is now throwing away everything the state can keep people at work and keep as many businesses from collapsing.
Initial hopes in March that it might take six months were shown to be hopeless optimists. We are now seeing something closer to three years to correct the economy.
The new, relaxed spending stance is a legacy of economic damage, and even more so, the political polarization that followed the austerity measures used to restore public finances after the last crash a decade ago.
The austerity measures can be avoided this time around due to the super-availability of free cash, ostensibly in the bond market, but actually issued by the European Central Bank (ECB).
With the Government able to lay hands on the money and the weight of expert opinion firmly in favor of spending it, there will be little choice, if any difficulty, to be made in this year’s Budget, and perhaps even in October 2021.
However, after that, things will get complicated.
The national debt may increase by ALL 40 billion between the beginning of 2020 and the end of 2022. Interest rates do not seem to be going anywhere before that, but after that even small increases will start to decrease. By then, an aging population would have added more than $ 1 billion to the pension bill, and health care costs – never in control at the best of times – would begin to spiral.
But if you borrow and spend deeds and the economy revives the costs of fighting the pandemic can be offset quickly. If not, where does it leave us in the long run?
Well, as Keynes himself said, “In the long run we’re all dead.”
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