At the start of the pandemic, economists were arguing about whether a so-called V-shaped recovery was in prospect – a quick recovery after a short lockdown. Yes I know, it seems a long time ago. Then as lockdown set in, an L got some support – economies would tank and stay flat for some time. And indeed without a massive rescue programme launched by the world’s central banks, it could have got nasty.
But as the pandemic went on, with its ebbs and flows, another letter came into the frame. We have been looking at a K-shaped recovery, with much of the economy heading upwards while the worst-affected sectors suffer. Nowhere is this more apt than in Ireland, with big implications for what happens next.
Extraordinary figures
At first glance, the economic data out this week would suggest that Ireland was having some kind of pandemic boom. And in some sectors it is. The latest figures for tax revenues are extraordinary – despite all the travails of the past year, taxes are strong across the board. In particular, the surge in corporation tax just goes on, with a record €4 billion collected in November alone. Other official figures showed rising wages and a continued fall in unemployment.
This pandemic economic bounce gives Ireland precious room for manoeuvre. We may need it, depending on what Omicron brings our way. There really isn’t a lot of point speculating about this – it seems the new variant is more transmissible, but other vital questions about its impact on those who have already had Covid-19, or are vaccinated, remain unanswered. Assumptions from Nphet on how many cases it might lead to must be very highly caveated.
But the risks to the consumer-facing part of the economy are rising again, as we see from the new guidelines and restrictions. Already hit by a wave of cancellations in recent weeks, the hospitality and events sector now face new uncertainties. The new supports announced yesterday for these sectors and those working in them will be needed. The only question is for how long.
Spreading growth
The financial leeway is there – for now anyway. While foreign investment in many guises gets a bashing, much of the buoyancy is from multinational manufacturers and the big digital service operations. Profits and tax revenues in these sectors are surging, companies are scrapping for staff and double-digit annual wage rises are the norm.
But strong growth has spread, too. Tax revenue of €60 billion was forecast for this year – it will now easily exceed €70 billion, with almost half the excess accounted for by corporation tax. A forecast deficit of €20 billion looks likely to be in the €7 billion-€9 billion range. The numbers at work are now ahead of pre-pandemic levels, and demand in the domestic economy in the first nine months of the year was down just 1.2 per cent from 2019, before the trouble hit. This is despite some sectors continuing to operate way below capacity.
The other part of the K is for real as well. The latest analysis by the Fiscal Advisory Council shows earnings in the higher-earning sector running more than 6 per cent above pre-pandemic levels, while earnings remained down in the exposed, lower-paid sectors, where hours worked were running 16 per cent lower. Those in restaurants, entertainment and the arts now face new restrictions and, more importantly, ongoing uncertainty.
Pandemic supports
While unemployment has fallen, the latest CSO data shows that more than half a million people remain reliant on the pandemic unemployment payment, the wage subsidy scheme or unemployment benefit. The path to cutting the pandemic supports, while now certain to be partly delayed, remains treacherous.
The real challenge for Government is to develop some kind of a coherent strategy moving into next year, while still remaining flexible. It’s not easy. But Ministers and the wider public health apparatus have done themselves no favours over the past weeks with mixed messaging and a refusal to plainly state that in some cases previous decision now looks wrong and have to be changed, or that new approaches are needed. This reluctance – and an apparent power struggle between public health officials and Government – damages the credibility of the message and undermines trust.
The Government may not have lost the room, but people are shuffling uncomfortably in their seats and asking questions. This may be inevitable given how fed-up everyone is, but some questions are legitimate. We have had the mess over antigen testing, where a Government-commissioned report was ignored for months, as was another one over ventilation in schools. Other governments are scrambling too, of course, and we have done some things well, but the challenges ahead are now clearly significant.
Short-term firefighting
The hoped-for gradual exit from pandemic restrictions heading into 2022 is delayed. We all might have hoped that while Covid-19 was clearly not going to depart the scene, it would slowly become a less important player through 2022. Now we just don’t know. As well as the short-term firefighting, a wider strategy now needs to be developed, with a longer-term focus. How do we manage to live with this?
The economic rebound has at least given us the resources to deal with this. Or maybe it is best put as a window of opportunity. The trend in corporation tax is as unpredictable as where Covid case numbers will now go, but Ireland is vulnerable to decisions in the headquarters of a few big companies. The exposed sectors still face a difficult outlook. And ECB policy which has allowed Ireland to borrow freely is uncertain.
Underlying economic strength will continue to provide significant resources, but we can’t rely on current tax growth rates continuing. We need to use the window of opportunity wisely and recognise that the bonus from soaring corporate tax revenues can’t continue forever.