Dr. Stephen Kinsella:

Thank you very much Chair for the opportunity to speak to the committee. I would like to discuss some competing priorities for budget 2022 and budget 2023. For a moment there I sounded like the former Minister for Finance, Michael Noonan.

I have been asked to speak about a post-Covid world but I am afraid I do not believe one will exist for two reasons. The first reason is biological: the evidence so far suggests Covid will become endemic. It will simply become a part of the life that we all expect to live with. It seems unlikely therefore we will ever be post Covid in any strict sense. The other reason is socioeconomic: I do not believe the pandemic has changed anything. It has accelerated previous trends around digitalisation, decarbonisation, and decentralisation. We will have to use fiscal policy to construct bridges between the gaps between the past and the future that Covid has created, in particular in areas such as retail where there are large numbers of jobs. The pandemic has also accelerated the level of anger felt by the public around the key issue of housing. In Ireland in particular we have become very used to the phrase, anger is not a policy, but post Covid I think anger actually is a policy because it is a policy variable. By altering expectations around policy formation and action, anger is now an economic variable. Therefore, it will alter our physical reality as the pandemic recedes.

One measure of this is the recent Red C poll results, looking at which party, if any, the respondent believes is best equipped to deal with a particular issue over the next five years. Most parties were in the middle. To illustrate a simple fact, on the issues of the Covid pandemic such as job creation, education, crime, the economy and health, the Fine Gael Party seems to be doing quite well relative to Sinn Féin and it is on housing and the rental market that this is markedly not the case. The ESRI's report on housing, which was produced today, is a reasonable summation of where we are with respect to housing policy and the need to use fiscal policy to address housing policy, which will be a key feature post Covid.

I draw the attention of the committee to a book by Eric Lonergan and Mark Blyth called Angrynomics. It is about how anger is used as a policy variable and how it is weaponised by those who would try to attain power using it. It is a very good dissection of the current policy tool that remains as a variable.

Turning to the outlook for 2021 and 2022, I reproduce forecasts and the figures are outlined in the submission for all major bodies for the Irish economy. They show an expected growth rate of between 4% and 4.5% this year and 4.8% and 5.2% in next year. I believe all of these forecasts are on the downside and it is likely that we will see higher levels of growth than this for two reasons. The first is that they do not include the economic recovery plan spending, which was announced this week. Second, as any economist who has studied the Irish economy carefully will be able to tell the committee, when the economy is allowed to rebound it rebounds much faster than most people can tell, including the people whose job it is to monitor it.

From these forecasts it is clear that domestic demand will expand, so people buying and selling things to one another within the domestic economy will expand following a release of savings across the economy. We have a very high savings rate in the economy and there are tens of billions of euro waiting to be spent. An operational question is where that will be spent, but that is perhaps for another day. It is clear that not all areas of the economy will benefit from this expansion of domestic demand. Uniquely in my experience as a professional economist, these forecasts all predict a strong expansion of economic activity to beyond pre-Covid levels without a correspondingly sharp reduction in either general unemployment or youth unemployment. In the past, in every single economic expansion that I have studied, every single increase in GDP and domestic demand has been associated with a sharp fall in unemployment and youth unemployment. The current forecasts by the Department of Finance, the IMF, the Central Bank of Ireland, the Irish Fiscal Advisory Council, IFAC, and the ESRI do not show a correspondingly sharp reduction in either youth unemployment or general unemployment. The way to look at that is to focus on the actual numbers. The Department of Finance's stability programme update, SPU, assumes a reduction in overall unemployment from 16.3% this year to 8.2% in 2022, and 6.7% in 2023. The IFAC assumes a reduction from 15.8% this year to 7.4% in 2023. While we assume a return to growth rates that are above the pre-Covid level, we are not assuming a corresponding fall in unemployment to its pre-Covid level. That suggests a pre-planned amount of structural damage in the system that fiscal policy post Covid will need to address.

To be fair, while the economic recovery programme, outlined on pages 14-15, has a focus on youth unemployment in an expansion of key programmes, the key assumption across the policy documents I have studied in preparation for this appearance before the committee is that young people, who have endured not only Covid but an unequal experience of the post-austerity period from 2013 to 2020, particularly with respect to building up equity in assets like pensions and housing, will experience above average unemployment rates even as the economy around them expands, prices rise, and those already owning assets like housing continue to do well. This is an unsustainable process and, much like the expansion of private credit in the boom period, unsustainable processes always stop.

The chart on page 4 shows just how deeply sectoral the nature of this shock has been. Essentially, in finance and insurance, information and communication, manufacturing and public administration, the wages, if one likes, have found themselves rising, whereas, all other areas from construction to transport, hotels, real estate and in particular the arts have been hammered. This will not be a surprise to any of the members of this committee. However, it is important to understand that in addition to looking very carefully at youth unemployment and youth activity - they very much overlap - we should also look at areas in which these sectors can be maintained, and repair as much as possible of the damage to the balance sheets of these firms.

A good example of this is that the employment wage subsidy scheme payments were just 5% of total earnings in all sectors of the Irish economy in the first quarter of 2021 but they represented almost 50% of total earnings in the accommodation sector. This is an extraordinary statistic. Half of the people in a particular sector were sustained by a single payment. This is a very good example of the deeply sectoral nature of the damage Covid has done. It also gives a strong rationale for fiscal policy to ameliorate the damage in this area.

It will come as absolutely no surprise to any Deputy that retail, tourism and accommodation are the areas to focus on in the budget for 2022. While some of the sectoral damage caused by Covid will be repaired by a simple reopening of the economy and, as I said at the very beginning, we will see a very large increase in the economic activity as the economy reopens, some firms quite simply will not be repaired. There is a deep correlation between these sectors and youth unemployment, particularly as 46% of those on the pandemic unemployment payment are under the age of 34. Where businesses in these sectors or subsectors fail, the State will need to be there to help.

I want to discuss budget deficit figures. The Government is targeting a budget reduction to within its legally mandated fiscal bounds by 2024 or 2025. It puts the economy on a glide path in budget 2022 towards a resumption of normality, albeit with a much higher stock of debt thereafter. What is important is to recognise that fiscal consolidation is inevitable once the economy opens up. Fiscal consolidation is not necessarily austerity but if it is poorly designed this is how it will feel, particularly to those whose supports are being withdrawn. Closing the budget deficit will become important not in budget 2022 but in budget 2023 and beyond. With respect to the binding fiscal rules, the European Commission recently stated the general escape clause of the Stability and Growth Pact will continue to be applied in 2022 and is expected to be deactivated as of 2023. There is a very important point to be made on when fiscal rules will begin to bind again, and the degree to which it will be difficult to explain to the public why the extraordinary largesse of the State cannot be extended by another year to them, given the amount of demand in the system.

Three options exist for closing the estimated gap shown in the figures. One is to allow growth and reopening to do most of the work while investing in structurally transformative elements, such as digitalisation and decarbonisation. Another is to raise taxes, particularly on employers and the wealthy. The third is to reduce public spending. The need to position the State's finances for some kind of balance does not chime at all with rising demands for ever larger capital spending, particularly on housing. Therefore, it is probable that public anger will continue to rise. I thank the committee for its time and attention.