Budget 2021:  Unprecedented borrowing in an unprecedented crisis

There were big numbers, sombre forecasts and a now mandatory bit of Seamus Heaney as the new Coalition Government yesterday (October 13th) announced the largest spending increase in the history of the State.

“If we winter this out, we can summer anywhere”, said Paschal Donohoe, quoting Heaney. But the extraordinary level of borrowing to fund huge current spending will take the edge off the winter. The danger is that if the impact of the pandemic continues after 2021, into 2022 and beyond, the “new normal” level of public spending could become unsustainable as an economically ravaged country considers how to repay tens of billions of debt.

That is for the future.  For now the sheer scale of the spending measures in the Budget will help bring social cohesion at a time of crisis.  Of the €17.4 bn spending increase, over half of it - €8.5 bn, will go to Covid 19 supports.  These will include huge business supports, pandemic unemployment payments to hundreds of thousands, and billions extra to help the health services cope and to keep schools open. The scale of State involvement in many sectors is now without precedent.  

The scale of this is best seen by comparing the cost of Covid 19 supports with the amount going to Brexit supports.  Once seen as the looming big hit to the public finances, Brexit supports will cost €340m in 2021, less than 5% of the cost of Covid 19.

Supports are going directly to support citizens, for example through spending on health, housing and the Pandemic Unemployment Payment.  They are also going to support beleaguered businesses facing huge difficulties.

Businesses of varying scale – and the workers within them - will welcome the extension of the Employment Wage Subsidy Scheme to March 2021, with a successor scheme then likely to run to the end of 2021.

 There are to be other important supports for SMEs, such as through a review of the Employment Investment Incentive Scheme (EIIS) to ensure SMEs can avail of efficient funding to grow employment-sustaining business. He said there would be changes to debt warehousing, allowing the deferral without penalties of some tax liabilities

Large business and Foreign Direct Investment in particular will have heard the clear warning from the Minister for Finance in relation to future Corporation Tax changes. He said the 12.5% rate remains in place, and that the €7.5 billion generated from it this year alone had been a hugely valuable contribution to dealing with the Covid crisis. But change was inevitable, OECD discussions on change would reach a crucial stage next year, and changes to the international tax framework would see a reduction in the level of profits taxable here, and therefore a reduction in the tax take in Ireland.

The Green Party can point to measures suggesting its presence in Government is having an impact, particularly in the areas of carbon taxes, VRT and home energy retrofitting.   Carbon taxes rise from €26 a tonne to €33.50 a tonne.  The Government says its changes to VRT will further incentivise the move to electric cars. Many in the motor industry dispute this, saying that that move is going as fast as it can go anyway, but this will certainly be perceived as a visible green measure. And the allocation to residential and community retrofit programmes of €221.5 million for 2021 represents an 82% increase on the 2020 allocation.

The scale of the borrowing allowed Minister for Public Expenditure Michael McGrath to announce very substantial increases in public spending in many areas, the State is now a very substantial presence in any sectors. Twelve months ago €18.3 bn was budgeted for health for 2020. Covid 19 ensured this rose to €20,3 bn.  For 2021 €22 bn is earmarked.

The State will also build 9500 social houses next year.  There is €110m, for affordable housing and cost rental and the help-to-buy scheme will be extended to the end of 2021.  The numbers on their own may mean little, but the allocation to the department of Housing has risen by €770m to €5.2 billion. €1.2 bn has been allocated for Land Development Agency to continue projects already underway

The list goes on.  There is a €130m allocation to the Arts Council, up from €80m last year, and €50m for the live entertainment sector. 

 The Minister returned to his seasonal metaphors towards the end of his speech, talking of shortening days and leaves changing colour.  “From the ashes of the pandemic”, Mr Donohoe said, “together we will build a stronger and more resilient Ireland”

There will be a lot of debt repayment on the road to that stronger and more resilient Ireland. If a means is found to reduce the impact of the pandemic over the next 12 months, then the enormous debt will seem manageable.  A long, long pandemic will bring us into uncharted waters, but there will be very many other countries in the same boat.