From top: Minister for Finance Paschal Donohoe and Minister for Public Expenditure and Reform, Michael McGrath, at a media briefing on the July Jobs Stimulus in the Government Press Centre, Government Buildings last week; Michael Taft
Any critique of the Government’s July Stimulus should acknowledge that they had to plan it in a metaphorical fog – not knowing the duration of the public health crisis, the extent of long-term economic damage, or the most efficient measures to employ in this unprecedented situation.
Nonetheless, there are certain benchmarks we can use to assess the stimulus plan.
How much of the plan is actual additional spending (above what would have happened anyway)?How much is just re-announcing previously announced measures?
How much is deadweight (that is, subsidising activity that would have happened anyway)? How much is targeted, going to the sectors most in need?
None of these questions have black-and-white answers. For instance, measure A may be more efficient than measure B, but the former can be done almost immediately – urgency sometimes being the enemy of efficiency.
And, yes, this scheme may have deadweight, but do the benefits still outweigh the costs? Fiscal policy, especially in a crisis, is not a slide-rule. And for many measures, we may not be able to pass judgement for months or even years.
Given these caveats and the flying-in-the-fog acknowledgement, let’s see how some of the measures stack up.
Additionality and the Pandemic Unemployment Payment (PUP)
The PUP will be extended to April. However, it will be closed to new entrants in mid-September. There is no doubt this payment provided a life-line to many households.
The number of recipients reached nearly 600,000, but with businesses re-opening the numbers have fallen by half. In announcing the extension of PUP to April, Minister Heather Humphreys stated:
‘The total cost of the payment, if modified as proposed, between now and April 2021 is estimated at about €2.24 billion. This is about €380 million more than would be paid out at standard jobseeker rates (that is, if the scheme was closed as planned in August).’
I’m assuming this refers to the overall cost since the PUP was introduced (though, in truth, it’s hard to say). It suggests that while PUP has put €2.2 billion into households and the economy, ordinary social protection payments would have put in €1.9 billion.
The additionality of PUP was only €380 million, which while desirable from the household’s perspective is far less than the headline number and, so, far less stimulating.
Cut in Headline VAT Rate and Commercial Rate Waiver
The Government took everyone by surprise by cutting the standard VAT rate from 23 percent to 21 percent. This will have almost no impact on prices but will assist business cash-flow. A VAT cut is administratively simple compared to an expenditure-based subsidy with qualifying conditions.
Similarly with the commercial waiver. But since they are across the board they are not very well targeted. Many businesses that don’t need help will still benefit.
The CSO reports that 10.2 percent of enterprises had higher than normal turnover in June/July, while another 28.2 percent had ‘turnover at or close to normal expectations’. Nearly 40 percent are not in urgent need of relief, yet they will benefit from these two measures.
However, businesses that have yet to open or have substantially reduced turnover (10 percent report turnover decline of 75 to 100 percent) may get limited benefits – especially in the hospitality sector.
The VAT cut and rates waiver, at a cost of €440 and €600 million respectively, could be highly inefficient at targeting relief at enterprises which need it most, though they are relatively quick to implement.
Help-to-Buy, Staycation and Deadweight
The Help-to-Buy scheme will be enhanced. The level of support available to first-time buyers will be increased to €30,000, up from €20,000, or 10 per cent of the purchase price of the new home/self-build property. This will run to the end of the year.
The Parliamentary Budget Office found the scheme was fraught with deadweight:
‘41% [of recipients) had a loan to value ratio of less than 85%, which means that they already had the 10% deposit requirement and didn’t need the scheme to meet the macro-prudential rules. This could be seen as a deadweight loss.’
Dominic Coyle makes this excellent point:
‘What housing needs is more supply, especially of affordable homes, not further tinkering to sustain prices that are already beyond the reach of so many aspiring homeowners.’
The only good thing about this measure is that it will only cost €18 million. Hopefully, it won’t be continued.
And what about the Stay and Spend Incentive? Taxpayers spending over €625 on accommodation, food and non-alcoholic drinks between October and April can get up to €125 back through a tax credit.
How much of this money would have been spent anyway? How much new spending will it induce (especially since people won’t get the credit until 2022)? How much of this will actually stimulate anything?
Public Investment
The stimulus plan envisages €500 million in accelerated capital projects covering schools, public transport, heritage and tourism, fishery and on-farm renewable energy investments, peatlands rehabilitation, local authority housing, and town and village renewal.
The July plan goes further:
‘The Government is also committing to increasing capital expenditure in 2021 to €9.1 billion. This level of capital expenditure represents an increase of almost €1 billion or 12 percent on 2020 levels.’
This sounds impressive – an additional €1 billion for capital spending. But is it additional?
While we don’t have the numbers, capital spending would have slowed in 2020 due to the pandemic crisis. So the Government is correct in saying that their projection represents an increase over this year.
However, it doesn’t represent an increase over what was already projected – in last year’s budget and this year’s Stability Programme Update.
A smaller example of this is the provision of €15 million for peatlands rehabilitation, an important element of the overall Just Transition strategy. However, in Budget 2020 reference was made to €5 million to be spent from carbon tax revenues and a reference to €7 million under the Culture, Heritage and the Gaeltacht portfolio.
Does the €15 million announced include these already committed allocations or are they additional to them?
[Note: some enterprising TD or political party might consider exploring this whole area of additionality and re-announcing previously announced measures through Parliamentary Questions and research].
The Road Not Taken
TASC’s Shana Cohen noted:
‘This first economic litmus test for this new Government fails to impress because it does not give the sense that the new FF-FG-Green alliance is prepared to think big enough to move beyond Covid-19 to a new normal that is predicated on equality, and – more profoundly – hope for the future. Instead of generating jobs for the sake of employment numbers, the stimulus package could have hinged on linking job creation to wellbeing, climate change and economic democracy.’
One could reasonably argue that the urgency of the situation required immediate action without the luxury of longer-term thinking. Conditionalities can take time to devise and implement. Nonetheless, while a government in the middle of crisis might not be able to work out the vision thing in the short term, it could give some signals as to where it might be heading.
Take for instance the biggest subsidy – the Employment Wage Support Scheme (which replaces the Temporary Wage Subsidy Scheme). This will cost €1.9 billion, or over a third of the entire stimulus package.
Under this scheme firms which have suffered a 30 percent decline in turnover will receive a flat-rate subsidy of up to €203 or €151 per employee, per week, depending on the employee’s gross weekly pay. This is a significant subsidy.
The government could have established sectoral oversight committees comprising the relevant stakeholders in the sector: employees, employers and civil society organisations. This was proposed by the SIPTU trade union.
These committees could have monitored the roll-out and implementation of the scheme, reported back on any sharp practices, and put forward policies to improve administration of the scheme.
This would have signaled that the government was moving towards a stakeholder model which could eventually develop the type of conditionalities that Shana Cohen referred to above.
Alas, there was no proposal, mention, or even hint that the Government was looking down this road.
* * *
We have programmes which are not delivering the headline amount of stimulus as is claimed (PUP), are administratively simple to introduce speedily but not very well targeted (VAT cut and rates waiver), spending targets which are just old targets (public investment), and are full of deadweight (help-to-buy, staycation incentive).
All told, these schemes make up the vast majority of the stimulus spending. Given this, will it be enough or will we have to return to the stimulus table?
One good thing: the Government can revisit these and other missed opportunities in the roll-out of the National Economic Plan and associated sectoral initiatives in Budget 2021.
The jury is still out.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.
