It will be a budget like nothing we have seen before – framed by the extraordinary circumstances and unprecedented uncertainty caused by the pandemic. Even in the last week, the backdrop has changed.
New restrictions have been imposed on much of the country, pushing many in the hospitality sector to close up – for now anyway. And the threat of a wider lockdown remains and will influence business and consumer decisions.
It is not all gloom. The latest economic reports from the Central Bank, the Economic and Social Research Institute and Ibec all point to the remarkable performance of sectors like pharma, medical devices and computer services in increasing exports and supporting jobs and tax revenue. But much of the domestic economy is being crushed, and the outlook for consumer-facing sectors and for jobs is worrying, especially if there are new restrictions.
So what can Ministers Paschal Donohoe and Michael McGrath do when they present the budget on Tuesday? Here are five things they need to aim for.
1 ‘First, do no harm’
In framing Budget 2021, Donohoe and McGrath must abide by the terms of the medical Hippocratic oath: “First, do no harm.”
This may sound obvious, but on budget day it often isn’t. We have seen before how this can go wrong, via unsustainable tax or spending plans or unforeseen mistakes which explode a day or two later and overshadow the whole post-budget debate. For a government that has stumbled through its early months in office, another needless controversy is the last thing it needs.
Steering a course through this will not be easy, but the two Ministers have tried to set the groundwork, clearly signalling that Budget 2021 will be all about Covid-19 and a couple of key areas such as housing and the green agenda. There simply won’t be the usual round of welfare and tax measures – though of course there will be some tweaks.
And the budget is being drawn up on pessimistic assumptions of a no-trade-deal Brexit and a no-vaccine pandemic outcome for 2021. In turn, this helps the Ministers to fight off demands for other measures.
If this sounds familiar, it is because it is. This time last year, Donohoe fought off demands for extra spending by drawing the budget up on the basis of a no-deal Brexit. This didn’t happen – but it led to a cautious budget and meant there was more leeway this year when the pandemic hit.
Assuming the worst and hoping things go a bit better means that next year there is a chance that budget targets will be met or exceeded again and that there will be some leeway to respond, as the pandemic and the Brexit events play out.
2 Keep options open
Budget speeches usually try to tie things down. This year that all went out the window, and spending will come in some €16 billion ahead of expectations, due to the Covid emergency.
Facing so many unknowns in 2021, the Government will want to keep its options open. A centrepiece of the budget will be a fund to meet the demands of Covid-19 and Brexit – much of which will not be allocated yet. It should meet demands for any extension of income and wage supports beyond next spring, measures to help individual sectors, plus training and placement programmes for displaced workers.
Some of these measures will be announced in the budget, but a bag of money – likely running to several billion – will be set aside to be used as needed. This should avoid any need for an emergency budget next year, which would send out a bad message internationally.
3 Continue the rescue mission
The massive State intervention in the economy has kept many people in jobs and supported the incomes of others. And supports have allowed many business that would otherwise have closed to remain open. Given the path of the pandemic, the Government was right to extend the pandemic unemployment payment and wage subsidies until the spring. But the gradual scaling-back of these is proving controversial, as the jobs crisis persists.
What happens if restrictions persist into next year? This looks likely, and so the rescue mission needs to continue and the income and wage support will probably need to be extended, in addition to supports for the worst-hit sectors.
One of the trickiest variables is that if there is no vaccine then consumer behaviour could change permanently. In the long term, some sectors may shrink or operate very differently – think pubs, travel and public events. This means some firms will not be viable and others will need help to reshape.
Or if a vaccine appears, do we go back to something like the way we used to live? In this case, it is more a case of keeping firms ticking over for as long as possible.
This is a really difficult dilemma in terms of shaping business supports. For now, the Government will try to keep as many ships afloat as possible. And it must also ramp up training, jobs placement and reskilling programmes for those who are losing their jobs permanently, especially younger workers.
4 Keep the Coalition together
Pushed by the Green Party, the programme for government made some key commitments to the green agenda, some of which will be reflected in the budget. The green recovery will be a central theme of the speech, promising increased investment in environmentally friendly projects – wind energy and public transport, cycling and walking infrastructure, retrofitting homes and public building.
On the other side of the ledger, carbon tax will rise – imposing a modest additional burden on households – and the Government’s senior officials have also outlined a proposal for a rise in vehicle registration tax on petrol and diesel cars.
There were also several proposals pushed by Fianna Fáil, including a cut in capital gains tax, which has been opposed by the Greens. With Darragh O’Brien holding the housing portfolio, that party will also be pushing for extra cash here and for an extension of supports for first-time buyers. The programme for government promised to examine the idea of State-backed mortgages for first-time buyers – it will be interesting to see if this is mentioned.
The indicators are that Budget 2021 may be agreed without too many coalition theatrics, particularly given the pandemic pressures. The tougher talking is likely next spring, when a longer-term economic programme is promised. Then they must address how to pay for everything that’s in the programme for government.
5 Give me hope
Finally, they must give us – realistic – hope that we can get through this. Until last weekend, the job of engendering some confidence with the budget might have looked doable. Borrowing this year is going to come in way below initial fears of €30 billion and will be closer to €20 billion. Some sectors are continuing to do well. And as the Central Bank and Ibec reviews pointed out this week, the tax coming in from the sectors doing well – and their employees – can help support those in trouble.
But a message that we could live with Covid-19 and keep the economy largely operating is now clearly in question. Much of the hospitality sector has closed again, and the public health experts have advised that the country moves to Level-5 restrictions. Even the less onerous Level 4 would involve, as now set out, closing large parts of the economy including much of the retail and leisure sectors. This would put hundreds of thousands back on the PUP and, given the shattered balance sheets in the SME sector, some companies would never reopen.
So the “we can get through this” message becomes a harder sell on Tuesday. Yet the Government has to try.
The X factor in any wider recovery will be a decision of consumers – those with money – to spend more and save less. The most difficult task of all will be to persuade people that there is a way through this and that while the hit is hard, recovery can happen and will be quicker than the financial crisis.
It will not be an easy sell.