The Government has warned it will withdraw the various Covid-19 supports once an effective vaccine is rolled-out.

In a report on the State’s fiscal response to the pandemic, the Department of Finance highlights that over €25 billion has been spent this year alone on measures to support households and businesses through the crisis.

And while the Government is committed to maintaining these supports “for as long as necessary” they will be removed with the deployment of a vaccine.

“Once an effective vaccine (or other therapeutics) is rolled-out and economic recovery more firmly entrenched, fiscal support must be withdrawn in a gradual manner,” the department said.

Unlike the financial crisis, the report notes that fiscal and monetary policy have been working together.

Policy

So while governments have spent heavily to cushion the shock to their respective economies from the shock, the European Central Bank (ECB) has complemented this by more accommodative monetary policy, which has kept interest rates low and borrowing costs down.

A notable side effect, however, is that the Central Bank of Ireland via the ECB now holds €44 billion of Irish Government bonds, making it the single most important creditor of the Irish Government.

In its report, the department outlines the various measures undertaken by the Government – wage supports for households, credit guarantees for businesses – to limit the economic and financial fallout of the pandemic.

“The immediate objective has been to limit the short-term economic fallout from the pandemic and, in parallel, to boost healthcare capacity,” the department said.

Objective

“A secondary – though no less important objective – has been to limit the medium-term damage to the economy; in other words, to minimise the possibility that firms and workers permanently exit the market,” it said.

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“While achieving these objectives does not come cheap, the cost of inaction would have been larger – in the form of higher unemployment, personal and corporate insolvency and permanent loss of productive potential,” it said.

In the report, it cautions that the cost of borrowing will no doubt rise as monetary policy becomes less accommodative, emphasising the need to more closely align the revenue and expenditure sides of the fiscal accounts.


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