Speech to the ESRI: The Pandemic: One Year On

4th March, 2021

Good afternoon to everybody, and let me start by thanking the Director of the Institute – Professor Alan Barret – for hosting this event today.


The changes we have all seen over the past year have been profound. 


So many moments of that year will be indelibly etched into my memory. The moment I heard of this virus. The moment the scale of potential harm and death became clear. And, as a member of the Covid-19 Cabinet Sub-Committee, since the inception of that Committee, the memories of so many difficult decisions that have had an impact on so very many.


In my time with you today I will:-

  • Emphasise the value of the foundations of the Irish economy and how they were recently strengthened;
  • Recognise the unique nature of the approaching challenges and opportunities;
  • Describe how we can approach and how we can successfully overcome these challenges while relentlessly pursuing many opportunities.


The fallout in the labour market

The pandemic has taken a toll on all aspects of life but, as Minister for Finance, l will focus here on the economic fall-out.


As we turn the page on one of the most turbulent years our country has ever faced, the labour market has been turned on its head.  To put some numbers on this: there are over 1 million people on some form of income support from the State – nearly half a million people receiving the Pandemic Unemployment Payment, another 350,000 being supported by the Employment Wage Subsidy Scheme, and nearly 200,000 on the Live Register.


Of course, the labour market fall-out has been uneven in several respects. 


Firstly, public-facing sectors have fared worst.  Sectors such as hospitality, leisure and personal services require face-to-face interaction and are much less conducive to e-commerce and social distancing than, say, office working or parts of manufacturing.  This is why business closures and jobs losses have been concentrated in these sectors. 


To put this into perspective, the number of hours worked in the food and accommodation sector fell at an annual rate of 53 per cent in the fourth quarter of 2020.  On the other hand, hours worked in the information and communications sector – much more compatible with remote working – rose 3 per cent over the same period.


The second distinctive impact is the disproportionate one on younger workers.  When PUP recipients are included, the unemployment rate in the 15-to-24 age cohort rose to 46 per cent in the fourth quarter of last year, compared with a total unemployment rate of 19.8 per cent.  In part, this is because of the higher incidence of youth employment in the contact-intensive sectors of the economy – often in part-time or entry-level jobs.


Thirdly, employment data also show that workers with lower educational attainment have borne the brunt; this is not unrelated to the sectoral nature of the shock.  For instance, the number of persons engaged in paid employment without a third level qualification fell by 10 per cent over the year to Q4 2020.  For comparison, and bearing in mind some measurement challenges, the numbers with a third level qualification engaged in paid employment actually grew over the same period.


In designing long-term policy responses, this uneven nature of the shock is important.  To put it another way: this time last year, the thinking was that the pandemic was a system-wide, symmetric shock.  It now appears that it is more of an asymmetric, sector-specific shock, with unique impacts.


The scale of these impacts is so large because these sectors employ so many and are so important to our economy and society.


The Government’s response

In recognition of this, the Government responded rapidly, bridging through to the recovery by putting in place a range of support for both firms and workers.  The overarching objective has been to support households and firms, as well as to limit the ‘scarring’, or permanent, effects of the pandemic.


In terms of quantum, around €38 billion of Government resources has been mobilised to date.  This is around 18½ per cent of modified gross national income, and compares favourably with supports provided in other jurisdictions.


An important consequence of these payments is that household income – at least at the aggregate level – actually increased last year, albeit at significant cost to the Exchequer. 


Indeed, data from the Central Statistics Office show that during the most severe phase of the pandemic last year – the second quarter – median household income fell by just under 2 per cent, once Government supports are included. The counter-factual scenario in which no support was provided would have resulted in a 20 per cent decline in median household income.


With supply side restrictions – the temporary closure of leisure, hospitality and many parts of retail – the fall in consumer spending has been far greater than the change in household income.  In other words, households – in the aggregate – have accumulated a large quantum of savings. 


The so-called savings rate – that part of disposable income that is not used to purchase goods and services – reached record levels last year.  In the second quarter for instance, the average household saved nearly €4 of every €10 of take-home pay; in normal times, the average household saves around €1 in every €10 of take-home pay.


Put another way, of the €126 billion of household deposits in the domestic banking system, around €15 billion of these have been accumulated over the past year – most of this is ‘excess savings’.


Ireland is not unique in this regard – the same pattern was seen in almost all advanced economies last year, though not to the same extent.  Importantly, this means that once the virus has been contained, the unwinding of the savings ratio will provide some support for economic recovery, at least in the short-term.


Preparedness of the economy

This extraordinary counter-cyclical policy response from Government is possible for two reasons – firstly, careful management of the economy in the pre-pandemic period and, secondly, the favourable sovereign financing conditions associated with monetary policy.


In relation to economic management, the public finances have been put on a solid footing in recent years.  Budgetary surpluses were recorded in the two years preceding the pandemic – with a primary budget surplus running since 2014 – while current spending increases were in line with the trend growth rate of the economy.  Government had also established a ‘Rainy Day Fund’ to insulate the public finances.


Moreover, the sort of macroeconomic imbalances that were allowed to build-up before the last crisis have not been evident on this occasion: there has been no credit bubble, for instance, illustrating why macro-prudential tools are so important.  Coming into the last crisis, we had annual credit growth of around 25 per cent; in recent years it has been broadly flat.


The structure of our tax system has also played an important role: we have not become dependent on transitory, transactions-based taxes, as was the case in the past. 


This shows the importance of maintaining a broad income tax base, with a progressive rate structure.  This is one of the reasons why our tax revenue has held up so well over the past year: for instance, total tax fell by just 3½ per cent and, notwithstanding the fall in employment, income tax fell by just 1 per cent last year.


None of this happened by accident. The regaining of national creditworthiness, the careful management of lending and the maintenance of sensible taxation structures during a period of economic growth were all political decisions. They mattered.


Their absence would gravely deepen our national economic challenges. Taking them as a given is to ignore their value in our efforts to rebuild.


But the European context is essential too.


Ireland, like every euro area Member State, has benefitted from the European Central Bank’s Pandemic Emergency Purchase Programme.  The most recent figures – which related to end January 2021 – show that the eurosystem had purchased over €10 billion of Irish sovereign debt since its launch in March 2020. To put it another way, the Central Bank is now the largest single creditor to the Irish Government. 


Additionally, by activating the so-called ‘general escape clause’ of the Stability and Growth Pact, the European Commission has allowed Member States to temporarily deviate from their budgetary requirements in order to take the necessary measures to effectively address the pandemic.  


So while ECB support helps to lower interest rates, it is important to remember that a budgetary policy that focusses on short-term counter-cyclical support and long-term sustainability keeps them low.


The careful management of our national finances that preceded the pandemic meant that we entered it from a position of strength; the exact corollary of the situation we faced at the time of the global financial crisis.


Equally, European institutions like the ECB, the Commission and the Council have responded in a very different manner to this crisis than that of a decade previously.


In large part, these advances have been forged at the political centre, both in Ireland and within the EU.


This is because the centre is not the same as the status quo.


It digested the social and political lessons of the financial crisis; it built a stronger institutional architecture to prepare for the next crisis; and it understood the social and political consequences of failing to meet the needs of its citizens at a time of great challenge.


And it is from the centre that we will build back once the pandemic has passed, while also responding again to the new lessons and risks that have been central to this crisis.


And to emphasise, once the extraordinary monetary supports are phased out, the benefits of prudent economic management pre-pandemic alongside determined counter-cyclical support during the pandemic, will become evident.


The full toolbox – fiscal and monetary policy

Of course, right across the globe, activist fiscal policy has been the order to the day. 


All of the main multilateral agencies that provide economic advice – the European Commission, IMF, OECD – take the view that, because the crisis was not caused by underlying economic imbalances, such as excessive credit growth or inappropriate fiscal policies, the correct policy response is for governments to deploy their balance sheets in a pro-active, counter-cyclical manner. 


This is why we have seen a surge in public debt across advanced economies and yet, because monetary policy has complemented this approach, the debt service burden is falling.  In effect, the two main macroeconomic stabilisation tools – fiscal and monetary policy – are working hand-in-glove.


There are several reasons why discretionary fiscal policy is now essential, and why it and monetary policy need to complement each other, especially in the current circumstances.


Firstly, the scale of this crisis – unparalleled in modern times – necessitates a more aggressive counter-cyclical policy response.


Secondly, monetary policy’s capacity to respond is constrained – at least in part – by the zero lower bound for interest rates.  In theory, of course, the short-term – or policy – rate could be moved into negative territory, but this would have potentially severe side effects, including by compromising the business models of the banking system in a market economy.


Thirdly, and perhaps most importantly, the shock is asymmetric.  The uneven impact across different sectors of the Irish economy is clear to see, as I discussed earlier.  Anyone who is able to go for a walk within their immediate locality can observe this.  


Monetary policy works at the aggregate level but, beyond the financial sector, cannot target individual sectors.  This is where fiscal policy is better suited to supporting incomes and employment.


These insights have guided the design and implementation of the Employment Wage Subsidy Scheme (EWSS) and the Covid Restrictions Support Scheme (CRSS). 


To date, EWSS has provided subsidy support of almost €2.5 billion, including PRSI relief worth €360m, to over 47,000 employers in respect of 532,000 employees.  There are over 20,000 firms in receipt of the CRSS payment with almost €330 million paid out to date.


The asymmetric nature of this shock will extend not just through the initial impact but, in all likelihood, also to the early stages of our recovery.  


As we see from the resilience of Irish GDP through 2020, large components of the traded sector of the economy have remained robust and are likely to be further boosted by the eventual turn-around in the global economy.  


At the same time, significant elements of the domestic economy remain effectively closed at the moment and may face uncertain futures for some time.  Hence, the need for targeted and continued State interventions to support workers and firms in these sectors.



Interest rates and growth: R-G

This interplay between budgetary and monetary policy has stimulated an important debate about the sustainability of higher public debt: this, of course, is not just of academic interest, it has implications for everyone in our society.


In Ireland, the debt-to-modified national income ratio rose to 108 per cent last year and is set to rise further this year.  Crucially, however, the low interest environment that we find ourselves in means that, despite this sharp increase in debt, interest costs are actually falling. 


To put this into perspective, last year’s interest bill absorbed 4½ per cent of total revenue; in 2013, the interest bill absorbed 12½ per cent of total revenue.  This phenomenon is repeated across other advanced economies, including in the euro area, UK and US.


Such shifts in the economic environment have led many high-profile commentators and policy makers to suggest traditional measures of assessing the burden and sustainability of debt may need to be re-thought.


Jason Furman and Larry Summers in the U.S, for example, have advocated for a move away from the traditional practice of analysing the stock of debt by reference to the flow of national income.  Instead, they focus on comparing interest rate flows to revenue flows: a more like-for-like comparison.  Olivier Blanchard, of course, has famously championed the ‘r-g’ debate of late, with great traction.  


All of these points are detailed and assessed in my Department’s Annual Report on Public Debt in Ireland, which I published a few weeks ago.  This emphasises that there is no single metric that shows whether a country’s debt is sustainable or not.


But if we accept the premise that ‘flows’ – the interest bill – matter more, then it is equally valid that other flows – namely the deficit – also matter.  The idea that ‘deficits don’t matter’ – especially for a small economy without the possibility to print its own currency – is so far wide of the mark as to be dangerous.


In other words, keeping the interest bill down will depend on reducing the deficit –at the appropriate pace and time – and setting out a clear and credible pathway to its reduction and elimination, particularly for funding day-to-day expenditure. 


Maintaining the public finances – and the interest bill in particular – on a sustainable path is particularly important within a monetary union where monetary policy is not always optimal for a small country. 


So while the policy framework with respect to deficits and debt is evolving, this does not absolve us of the need to reduce our deficit over time. 


Yes, we need to continue to provide counter-cyclical support for the economy; but this support must, of course, be sustainable. 


There is a new balance that we must attain.


To sustain our debt, to manage our deficit we need economic growth. That economic growth requires and is receiving, and will receive, strong support.


And, to be perfectly clear, these supports are essential. I know their value as, in collaboration with other colleagues, I introduced them. To withdraw them too soon would be damaging to our national finances due to the likely harm caused to jobs and income. I know this from regular engagement with the Irish business community.


But it is important to also be clear that the need to manage our national finances differently will emerge. And it is in our interests to be ready for that moment.


This will undoubtedly be the subject of continued debate but the truth is nobody can know for certain the future path of interest rates. 


Indeed, it is notable that inflation rates in many countries have picked up in recent months; this has been accompanied by increases in inflationary expectations as market participants have priced-in higher inflation rates in the coming months.


There are two things which we do know.  Firstly, the higher the stock of public debt which you are carrying, the more painful any increase in borrowing costs will be.  And secondly, the more carefully a national deficit is managed the better the prospects for more affordable costs.


Next steps

The policy challenges are indeed complex.  We have navigated our economy and society through some serious challenges before – testament to strong economic foundations – and we will do so again.


As President of the Eurogroup and a member of the G7 Finance Minister Group I am privileged a play a role in the coordination of our efforts across Europe and with leading economies.


At a European level, I welcome yesterday’s Commission communication on “The fiscal policy response – one year since the outbreak of COVID-19” and the Commission’s preliminary indication to extend the general escape clause into 2022.


This statement provides much needed clarity for Member States as we all work to navigate these uncertain times.  From a Eurogroup perspective, we will reflect closely on this communication in our meeting later this month.  Particularly how this feeds into the coordination of budgetary policy in 2022.


While not pre-empting these discussions, I anticipate that this very important communication will provide the basis for continued agreement on coordinated economic policy. This could build on our assessment last December, which at the time, focused on the need for a supportive fiscal policy stance.


This will be discussed in our meeting in March and again during the summer.


Also at a European level, there are a number of important deliverables over the next few months.  These include the work to finalise stability and convergence programmes and to complete the national Recovery and Resilience Plans.  


Following these, the Commission will provide new forecasts in the spring and we look forward to their fiscal policy guidance as part of the European Semester.


All of these will be on the Eurogroup’s work plan through to the middle of this year and into 2022.


At national level, the Government will bring forward a National Economic Plan and a Medium Term Plan to align public spending with revenue, as provided for in the Programme for Government.


This Programme also provides for the establishment of a Commission on Taxation and Welfare, which will review and make recommendations on how our taxation and welfare system should develop over the next 10 to 15 years. 


The tax code and the welfare system are among the most important tools available to us as a society, so it is important that we review how well the systems we have today are serving our needs and their suitability to meet the challenges of tomorrow. 


I expect the Commission to look across a number of policy objectives, including promoting economic growth and social inclusion, as well as reducing our carbon footprint.


The global reach of the virus has altered how we think about uncertainty, and in particular so-called ‘tail-risks’.  


Just 12 months ago, no one would have believed the year we were about to endure.  In order to reduce the vulnerability of the economy and the public finances to some of this uncertainty, reducing the debt ratio back to lower and safer levels must be a key priority over the medium-term.  This will, once again, provide us with options should we face another unexpected shock in the future.


To conclude, vaccination is now being rolled-out across the country and the beginning of the end is, hopefully, now in sight.  Many of our youngest citizens returned to school earlier this week and, all going to plan, more will return in mid-March.


The challenges are great, but we have achieved much and, in our national efforts to prevail over this disease, we will achieve more.


Thank You.