Cliff Taylor: There is a reckoning coming and big decisions lie ahead

Decisions, decisions. Coronavirus has led to some of the biggest economic calls ever made by an Irish government, pumping billions into the economy to support businesses and households. Yet as we exit the worst of the pandemic, some really big decisions – ones which will in many ways define the coming years – will have to be made.

The Irish economy is an unusual combination of multinational and domestic activity. Both economic engines will be affected by what happens next. Key parts of the domestic sector have been decimated by the pandemic. That is one problem to be addressed. And now the international sector is facing big change in its taxation rules as it became clear that a major reform push in this area is coming from the United States. This too is driven by the pandemic and the need for exchequers to raise cash to pay for post-coronavirus investment.

In the middle stands the Government, with big borrowing and the lingering uncertainties about how the rest of this year will pan out.

A lot now hangs on getting the vaccines out – and hoping that they can succeed in allowing a sustained reopening

So let's take a deep breath and look at what lies ahead. Next week Minister for Finance Paschal Donohoe will publish updated forecasts for the economy and public finances for the next five years. These will be based on no change in economic policy – the big decisions will await a wider plan due over the summer. It will show the pressure on spending and borrowing this year, though strong tax revenues may allow some reduction in the deficit forecast for this year, underlining the remarkable resilience of much of the economy.

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A lot now hangs on getting the vaccines out – and hoping that they can succeed in allowing a sustained reopening. So far the indicators from countries such as the United Kingdom and Israel are good – though you would expect the new forecasts will look at a variety of scenarios.

On the assumption that growth can bounce back as restrictions lift, borrowing should fall fairly sharply in future years. In other words, there is hope that recovery can cut the deficit without a return to the tax hikes and spending cuts we saw after the financial crash.

That is not a free pass, of course. The one-off spending incurred to fight the pandemic – the Pandemic Unemployment Payment and wage subsidies for example – will wind down. They have pushed the national debt higher, but this is affordable. Where the decisions will be needed is how to pay for the ongoing spending increases, some coming from the pandemic in areas like health and some from other things the Government want to do.

Big decisions lie ahead here. In the summer the Government will have to decide what its goals are for the deficit and the key questions will start to become clear. We exit with a bigger State than we went in – and this will have to be paid for.

And then there will be the pandemic clean up. The positive is that the hit to the pandemic is fairly contained to a few key areas. However, the flip side is that several sectors have been hit really hard – hotels, pubs, restaurants, travel, events, the arts, leisure and so on. A Central Bank report this week found that one in six SMEs were in financial distress.

We can expect the US to put pressure on Ireland to sign up and for the man leading the OECD talks, Pascal Saint-Amans, to be out saying that Ireland needs to compromise

The Government is likely to continue supporting the worst-affected sectors. But there is a reckoning coming here for many businesses and a real need to channel support and help to those with a prospect of survival. Support may well be needed for some sectors right through 2022 and beyond. This will be complicated and politically tricky. In future we may spend money in different ways – shopping more online, for example, or travelling more cautiously – and so some SMEs will find that their business has changed fundamentally. Picking who to help and how to help them will not be easy.

And then there are the multinationals, a vital contributor of jobs and on the taxes helping to pay the bills. The political capital the Biden administration is putting into corporate tax reform is huge. It needs cash to pay for massive investment and if US companies are going to pay, then the US does not want them moving more operations offshore to avoid a higher tax rate at home. Desperate for cash themselves, the other big countries have indicated their support. If the G7 agree, can Ireland really say no? We all know the answer to that. Ireland has put its faith in the OECD process, even if the outcome was never clear.

President Joe Biden has proposed a 21 per cent tax rate on the global earnings of US companies. There is no question that the pressure will soon be coming on Ireland behind the scenes. The big countries want to agree a global minimum rate – maybe lower than the proposed US rate, but higher than our 12.5 per cent rate. Perhaps the US will compromise on its own 21 per cent rate as part of this or perhaps not. And it seems there is a political route for Biden to get key parts of his plan through Congress quickly, avoiding Republican delaying tactics.

This could leave the Government facing a defining decision – does it agree to raise the 12.5 per cent rate, say to 15 per cent, the kind of level where OECD compromise might fall? We can expect the US to put pressure on Ireland to sign up and for the man leading the OECD talks, Pascal Saint-Amans, to be out saying that Ireland needs to compromise.

This all looks set to come to the boil over the summer – just about when we hope the domestic economy will be emerging from the lockdown and the Government is planning its longer-term strategy for the public finances. No pressure then!