Covid-19: Impact on the Fiscal Position (Resumed)

I welcome from the Economic and Social Research Institute, ESRI, Professor Alan Barrett, director, Dr. Barra Roantree, research officer, and, via video link from the ESRI, Dr. Karina Doorley, senior research officer, as well as via video link from the department of economics at the University of Limerick, Professor Stephen Kinsella.

Witnesses have been advised on the issue of privilege. I want to advise that witnesses giving evidence from a location outside the parliamentary precincts are asked to note that the constitutional protections afforded to witnesses attending to give evidence before committees may not extend to them. No clear guidance can be given on whether the extent to which the evidence given is covered by absolute privilege of a statutory nature. Persons giving evidence from another jurisdiction should also be mindful of their domestic statutory regime.

Members are reminded of the provisions within Standing Order 186 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I invite Professor Alan Barrett to make his opening statement. If he could conclude it within five minutes it would be appreciated.

Professor Alan Barrett

I thank the Chair and the committee for the invitation to speak here today.

The institute has undertaken much work on the Covid crisis since March, including our inputs into the work of NPHET, analyses of topics such as childcare and working from home, and the work on which we will focus today, namely, the fiscal impact, with particular reference to social protection expenditure.

I refer first to macroeconomic impacts. In the recent Quarterly Economic Commentary, authored by our colleagues Mr. Kieran McQuinn, Mr. Conor O'Toole, Mr. Matthew Allen-Coghlan and Mr. Cathal Coffey, three scenarios for the economy in 2020 were presented. In the baseline scenario, the lockdown restrictions are gradually lifted until August, in line with the original Government guidelines. After this point, the economy enters a recovery phase that lasts until the end of the year. Under this scenario, real GDP is forecast to decline by more than 12% this year. Private consumption expenditure is expected to fall by 13% this year. The fall in investment is even more significant, declining by approximately 28%. International trade will also decline significantly, with imports falling by 12% and exports falling by 8%. In the severe scenario, the economic shock is even more stark, with a second wave of the virus resulting in the country going back into lockdown in quarter 4. In this case, real GDP is forecast to decline by more than 17% in 2020. The final scenario is the benign scenario. This is the most optimistic scenario, based on a situation in which the pandemic is suppressed so effectively over the latter half of the year that the economy returns to normal "pre-Covid" conditions in quarter 4. Under this scenario, the economy is forecast to decline by about 9% this year.

The impact of the crisis on the labour market can already be seen clearly. Including those on the pandemic unemployment payment, PUP, the unemployment rate reached over 28% in April. Work by ESRI colleagues Beirne et al. and Dr. Barra Roantree has shown that the pandemic has had an asymmetric impact across the labour market, with some sectors and demographic groups impacted more significantly than others. In our baseline scenario, the unemployment rate is expected to average 17% for the year as a whole.

No matter which scenario we find ourselves in, there will be significant repercussions for the public finances in 2020. In our winter 2019 commentary, we had forecast a modest deficit of 0.3% of GDP this year. This has been revised down to a 9% deficit under our baseline scenario. In nominal terms, this is a deficit of approximately €28 billion.

Let me mention the PUP. Drawing again on the analysis of colleagues Beirne et al., we estimate the Exchequer impact of job losses in three scenarios. The medium job-loss scenario, involving 600,000 job losses, with the PUP in place is estimated to cost the Exchequer €4.9 billion per quarter, around €800 million more than in a situation in which the existing system of welfare supports remain unchanged.

We find that the introduction of the PUP did much to cushion incomes from Covid-19-related job losses. Figure 1 of my written submission, which I hope Deputies have in front of them, plots the number of families we estimate are affected by a job loss in our medium unemployment scenario, grouped by the size of the change in their disposable income. The number of families who lose more than 20% of their disposable income is reduced by around a third with the introduction of the PUP, and the number who lose more than 60% is reduced by almost one half.

That the PUP leaves some families with more disposable income out of work than they had in work raises the question of how the payment affects financial incentives to work. Although these may be of little importance while public health measures are in place, our simulations suggest careful consideration should be given to how these supports will be scaled back.

In addition to the PUP, the Government also introduced the temporary wage subsidy. Beirne et al. examined the impact of the initial version of this scheme on the Exchequer and households. This version of the scheme was less generous to lower paid employees than the revised scheme and excluded some higher earning workers from eligibility.

The Exchequer cost of the temporary wage subsidy scheme, TWSS, was found to be potentially lower than the cost of the PUP as many workers are entitled to less than €350 per week under the scheme, and many receive a top-up payment from their employer. This conclusion will remain true for the revised scheme. We estimate that if half of those who lose their job in our "medium" unemployment scenario were to instead remain in work and receive the temporary wage subsidy alongside the maximum employer top-up allowed, the net impact on the Exchequer would be €360 million less per quarter than the PUP. This equates to approximately €120 million per quarter less for every 100,000 who transfer from the PUP to the TWSS, with a full-top up paid by the employer.

There is more on the TWSS in my written submission but I plan to proceed to my concluding remarks. We can pick up on some of the issues concerning dead weight and others in the questions.

The ESRI, in its macroeconomic forecasting work, has not yet attempted to provide forecasts for 2021. We judged that there was simply too much uncertainty for such an exercise to be undertaken. However, like other forecasting agencies, we expect a fiscal deficit to remain in 2021 even in the context of a likely recovery. From a policy perspective, ongoing borrowing to fund such a deficit will be the correct option. The key consideration here is that borrowing is appropriate in the context of a temporary deficit which is likely to be closed as the economy grows. It will also be advisable to borrow for investment under a stimulus package. With interest rates close to zero, such a course would help to reboot the economy while also tackling some of the infrastructural needs which are well understood.

Much has been written about a possible expanded role for the State in a post-Covid society, covering issues such as health, childcare and basic incomes. While borrowing is the appropriate response where a deficit is cyclical, an enhanced role for the State will have to mean higher taxes. Though the precise source and structure of those taxes is an open question, an increase in the total tax take is likely to be needed.

I ask Dr. Kinsella to make his opening statement. Can Dr. Kinsella hear me?

Dr. Stephen Kinsella

Can I be heard?

Yes. We will take your opening statement.

Dr. Stephen Kinsella

"You are on mute" seems to be the phrase of the pandemic. I thank the Chair and the committee for the chance to address these important topics. I would like to make four points in my introductory remarks.

A large fiscal deficit of around €30 billion is unavoidable in 2020. Government spending is unusually impactful at low and very low interest rates. With the economy deeply depressed, even in a small open economy like Ireland's, stimulus measures will be very effective. Stimulus measures should be significant, up to approximately 10% of modified gross national income, or €20 billion, including measures announced to date, which are approximately €7.8 billion. Much of this spending should come from funds linked to European programmes.

Social protection expenditure from Vote 37 will likely substantially exceed its 2019 Estimate of €21.2 billion. In May 2020, the expected cumulative spend up to the end of that month was to have been €8.7 billion. It ended up being €11.7 billion, approximately €3 billion more. There is no doubt that June, July, and August will also see substantial increases in spending above profile as the pandemic income supports to employers and to employees are continued. The Department has already spent more than half of its allocated money, and so a Supplementary Estimate of €2 billion to €3 billion for Vote 37 will be required to take it to the end of the year, assuming 200,000 more people remain unemployed in September and that income supports are tapered rather than summarily withdrawn by sector.

My third point concerns the sectoral nature of the collapse. Beyond the disaster relief phase, when we exit phase 5 of the pandemic, a range of income supports will have to be kept in place for badly affected sectors such as the arts, tourism, and travel. This will greatly impact Vote 37 and Vote 32, Business, Enterprise, and Innovation, which will most likely see its spending expanded to help businesses to thrive post Covid. The EU's Support to mitigate Unemployment Risks in an Emergency, SURE, scheme may be required to help here, but that is perhaps too small. In addition, a range of capital supports will be required for our SME sector. A core function will be saving the maximum number of SMEs affected by the crisis, which are mostly small or tiny firms. I hope Deputies can see the figure about SMEs that I provided in my more lengthy remarks.

My final remark concerns readiness for any future crisis. There is a risk of the virus returning. The committee should sponsor risk mitigating scenario analyses linked to actions for key Departments and agencies. Should the virus force lockdowns of our communities in winter 2020 or in 2021, it is incumbent upon us to be prepared. Research is key in helping to offset the impact of the virus on our economy and society. For example, firm-level balance sheet analysis would be very important.

Without this knowledge and a policy of supports to offset large-scale liquidations, policymakers are, in effect, working blind when trying to support businesses. Research will inform new models of service delivery for all, including in health, education and business, and will ensure there is a focus to address the specific needs of the most vulnerable in society.

Thank you, Dr. Kinsella. We will now move to the question-and-answer session and the first speaker is Deputy Colm Burke.

My first question is one I put to the other witnesses this morning. We are trying to look at all of the scenarios but one of the issues not being taken into account is a no-deal Brexit. What scenario does it put us in with regard to dealing with the economic challenges we now have and the new economic challenges that could arise if there is no deal on Brexit?

Professor Alan Barrett

I touched on this point in my opening remarks. For the first time since 1968, when we started doing short-term economic forecasts, the ESRI did not attempt to do a forecast for 2021. Maybe that was cowardice to a certain degree but the reality was that we had the view that there was so much uncertainty - we can tease some of that out - that it was going to be very difficult to do it. In all fairness, agencies such as the Department of Finance have to come up with some sort of forecast but we figured that we did not absolutely have to do it and we chose not to. A year or two years ago, the institute was working very intensively on Brexit matters, often in collaboration with the Department of Finance, and we were coming up with estimates in the event of a no-deal scenario. It is so long ago now that I cannot remember the precise figures but if they were of the order of negative 4% or 5% on GDP, that would not surprise me. The terrifying spectre is that rather than having simply the addition of the downturn as a result of Covid-19, there would be the addition of that downturn plus Brexit and some sort of multiplication of the two. My guess is that this could be the case. It is possible that the impact could be horrendously severe.

The percentage of young people unemployed at the moment is approximately 51% in real terms. We have challenges now that we did not have before. Previously, a lot of young people emigrated but that is not going to happen now. What initiative does the ESRI believe should be in place to target people in that group in order to get them into employment or training?

Dr. Barra Roantree

In work we have done and which we published in the ESRI quarterly economic commentary earlier this year, we showed that there really has been a stark impact in terms of job losses, with young adults experiencing much higher rates of job loss. At its peak, 50% of those aged 18 to 24 lost their job, with that percentage declining with age. The jobs losses really are concentrated among young adults. We know this is a big issue because there is a wealth of economic research which shows that for those who finish school when times are bad, there tend to be long-run scarring effects, as economists call them, on future outcomes. This effect is not just in terms of employment. There has even been evidence to show an increased incidence of criminal charges later in life. This is found in most of the international evidence. It is really important that we look to address that issue and ensure it is highlighted.

As for what to do, we have colleagues at the ESRI who have done quite a lot of research on which programmes work and which do not. I am sure we can provide the Deputies with a tighter list of what that research has found. In general, things that bring young adults into contact with the labour market, such as putting them in internships and giving them experience and real-life skills, tend to be more effective than schemes which offer more general training. Those types of schemes which build up firm, specific human capital tend to be the most effective ones. One can see potential options in this regard into the future in terms of things like some of the priorities that have been laid out, for example, for retrofitting houses. Those are the types of opportunities where we might be able to get people into schemes at quite a young age and train them up and for which there may be good prospects in the years ahead.

Those are the types of issues one might want to prioritise.

In regard to that 51%, do we have a breakdown of the educational qualifications of the individuals in question? Has a detailed analysis of that been done?

Dr. Barra Roantree

Unfortunately, that information is not in the data that have been published to date. Hopefully, it will be available in the months ahead as the CSO's survey data become available. One would imagine that they would tend to be people with lower levels of education, given the type of sectors that have been hit, but we do not know that for sure at the moment.

We do not even have an indication at this stage.

Dr. Barra Roantree

Not at this stage. Once the labour force survey data being collected by the CSO are published and made available to researchers, we will be able to get a sense of where that burden has fallen heaviest by education.

Should educational institutions provide additional capacity to take people back in order that they can gain additional qualifications?

Dr. Barra Roantree

Educational institutions will play an important role in that. Sometimes more attention is given to higher education institutes than further education institutes. Something that will be particularly obvious in the months ahead is that the focus might be switched around. If we are talking about retraining for, say, energy retrofits, further education institutes may be more suited to providing that type of training than, say, higher education institutes.

Deputy Foley has five minutes.

I welcome the witnesses and thank them for their papers and presentations. We are all very conscious that there is a risk of the virus returning. We discussed that earlier this morning with the Irish Fiscal Advisory Council witnesses. I ask Professor Kinsella to elaborate on his view that the committee should sponsor a risk-mitigating scenario analysis linked to actions for key Departments and agencies. What exactly does he envisage in that regard?

Dr. Stephen Kinsella

In evidence I gave to the Committee on Budgetary Oversight last year, I talked a little about the need for fiscal risk analysis, so looking at specific key categories that the Government spends on and trying to figure out the impact on the economy if, for example, corporation tax were to drop by 5%. Those kinds of fiscal stress tests are done by many agencies throughout the world. The idea here would be that a Department or series of Departments would begin writing a scenario analysis, much like the one the ESRI has just completed, looking precisely at scenarios such as the virus lasting for two years or four years and setting out what would be the impacts and what we would do about it in those scenarios, the idea being that we are aware of the risk and we have a plan to mitigate the impact of the risk should it arrive. They are not necessarily part of the risk registers we often see. They are definitely not part of the scenario analyses that our colleagues in the ESRI produce. The first step is to say, "This could happen"; the second is to say, "It could be this bad"; and the third is to say, "This is what we are going to do about it". Connecting those three steps is very important. The State has responded extremely well to the crisis but it has been in an entirely responsive mode. If we look at areas like supply chain resilience, we need to get much better at having a very resilient, chilled supply chain.

I do not like to cut Dr. Kinsella off but I have limited time.

Dr. Stephen Kinsella

I am sorry.

I appreciate his point that a combination of clarity and preparedness will breed confidence as we move forward. I thank him for that.

I have a specific question. Deputy Colm Burke raised the very definite impact of the crisis on younger people, which I accept completely. Has a study been done or are data available on the impact on the tourism sector, specifically the way in which seasonal workers have been impacted? I come from County Kerry, which is a tourism based county. In my view, seasonal workers have been very much left out of the loop. Are there any data to support that view? What measures would Professor Kinsella envisage for seasonal workers? I would say the same applies to people aged over the age of 66 who might remain in business and have been negatively impacted by Covid-19 as well as those aged 66 and over who are in employment.

Are there any data to support those studies?

Professor Alan Barrett

Can I jump in on that and perhaps Dr. Roantree might want to add to it?

Professor Alan Barrett

I am not entirely aware that there have been any specific studies, but I will address the question in the following way. One of the great difficulties when talking about the group the Deputy is referring to is that their fate has yet to be determined. We do not know yet precisely when things are going to start and how vibrant the tourist season will be. A certain amount has been lost, but this is very much that sort of group that it may not be as catastrophic as we thought, or it may be. We do not know and we have to keep a watching brief on that.

To link to one of the earlier questions when we talked about younger workers, retraining and these sort of issues, one of the great challenges for the State is going to be that if the projected unemployment is going to be as big as expected, the existing retraining infrastructure will simply not be able to cope. We are then into the business of trying to work out how to prioritise and allocate people to training schemes in the reality that not everybody is going to be facilitated. It is at that point we will have to get more data on the skill mix of people and make sure we are concentrating resources on those who face the greatest disadvantage, which could include people who are in sectors or regions that have been severely impacted.

To sum up, I am not aware that a study has been done, but a good amount of thought has already being given to some of the issues the Deputy is talking about.

I would suggest it is worthy of study because seasonal workers, particularly, have been the forgotten sector in the current pandemic.

Dr. Barra Roantree

I think the Deputy is right. We know that the job losses have been heaviest in the accommodation and food services sector. A lot of those workers are likely to be seasonal. That is going to create huge issues in that while they might not show up in terms of the people who have lost jobs, they will be people who will not have got jobs they would have otherwise. That relates to the issue of social welfare expenditures. If benefits are tapered on the basis of previous earnings, particularly earnings in January and February, seasonal workers' earnings fluctuate a lot through the year, and it might be that they were below a level of €200 in January and February but would have had much higher levels of earnings during the summer. That is an issue that comes with the tapering of any benefits based on earnings in a particular month or week, particularly concerning those seasonal workers.

On the issue of older workers, something we also highlighted in the quarterly economic commentary is that, in addition to the numbers of job losses indicated by the number of claims for the pandemic unemployment benefit, PUP, which a person must be between the ages of 18 and 66 to get and which same conditions also apply to most other jobseeker's benefits, there are tens of thousands of older workers above the age of 66 who might not be showing up in those figures. When the figure for job losses at the peak was 600,000 on the PUP plus another 200-odd thousand on jobseeker's benefit, to that we might add older workers who are not captured in those statistics. That is worth noting.

Cuirim fáilte roimh na finnéithe chuig an coiste. What do the witnesses think the level of stimulus should be this year? Professor Kinsella mentioned a figure of €6.5 billion. Is that in addition to supports such as the temporary wage subsidy scheme and others? I ask the ESRI the same question.

Dr. Stephen Kinsella

If it is assumed the fall in gross national income is somewhere between 10% and 15%, it strikes me that a stimulus with a multiplier of around 1, that is, a stimulus of approximately 10%, makes sense, which is around €20 billion. We have already spent something like €8 billion, so I would imagine a stimulus north of €10 billion makes sense, but between €10 billion and €12 billion is something I would suggest. The figure of €6.5 billion was my computation of Ireland's amount that will come from European programmes alone.

Professor Alan Barrett

If I could come at it a slightly different way, the sort of figures being mentioned, such as €10 billion, sound perfectly reasonable.

To add a note of caution, however, there is always a danger in these sorts of things if a figure is decided upon first and then decisions are made on how to spend it. I will give some examples, and I have touched on this already. While there is a commitment to retraining, there is no point stating €2 billion or €3 billion will be spent on retraining if there are no classes, teachers and all of those things in place. Likewise, the institute got into some trouble some years ago when we criticised a national development plan because it could, potentially, be inflationary. Spending buckets of money where there may be bottlenecks, of whatever nature, does not make a great deal of sense either.

Several design features are critical. Figures such as €10 billion sound perfectly reasonable.

Professor Alan Barrett

Those funds should be spread across things such as infrastructural investment, particularly with green and housing components. It is a really good idea to do the sort of retraining we spoke about as well. Business supports are really important but let us be careful in designing them so we ensure we direct those supports at businesses that have a future, rather than those that do not.

Perhaps we can look at those business supports. I have been quite critical of the Government and I believe we are way behind the curve, looking at where other countries have supported businesses, and SMEs in particular, because they are the backbone of our sector. The grants available are small in comparison with other areas, including in our closest neighbour in the North, where grants to affected sectors amount to £25,000, rates are being waived for a year, bounce-back loans are hugely drawn down because they have a 0% rate of interest and no repayments for 12 months, compared to the 4.5% rate of interest being offered here. What types of supports does Professor Barrett believe are required by SMEs? I refer to a stimulus package, including grants and access to credit.

Professor Alan Barrett

Again, I do not have a clear answer to that question, because we would need to know much about the micro-details of many of these firms to give a comprehensive answer. I have two quick reflections, however. We wrote about one of these concerns in one of our ESRI outputs. In the early stages, the focus seemed to be very much on loan facilities. We all learned the lesson from previous experiences that SMEs having more and more-----

Professor Alan Barrett

-----borrowing attached to them almost inevitably meant that they were not going to emerge from a crisis. We can pass on more information on this topic after this session. Several of my colleagues had been examining SME financing pre-Covid-19, and one of the things we noticed was that there was already a reluctance among Irish SMEs to take on board debt. That was before there were difficulties. If there was already reluctance, it always struck us as highly unlikely that a loan-driven approach to this issue was going to succeed.

At some level, we must design measures that get cash to businesses without burdening them. Most economists speak about this problem. The great challenge of industrial policy, through big, medium and small companies, is how to differentiate and ensure that resources will be directed in a way that will really assist companies to blossom, rather than merely subsidising companies.

That is a fair question, and I will ask Dr. Kinsella about it. Trying to get what we are going to do pitch perfect in the middle of the pandemic would burn time while companies close. We will always have what is called deadweight in some of these scenarios. Given what was mentioned by the representatives from the ESRI about the level of loans, I note that more than €4 billion in loans have so far been promised, whereas the grants have been as low as €250 million. Where does Professor Kinsella see the balance needed regarding supporting our SMEs in the next year?

Dr. Stephen Kinsella

The first thing to note is how poor those data are on the SME sector. The latest research from the Central Bank on this topic uses a survey from 2017, with data from 2016. It is fair to say, therefore, that we do not really know what an accurate picture of the SME sector looks like. That is a plea for better data and more research on this issue.

The second point is that we need to understand the balance sheet of a firm, which is the composition of a firm's assets and liabilities. In that situation, given we are not going to have those data any time soon, it behoves us to think about direct grants to firms and accepting the inevitable deadweight loss.

There will be a cost and money will be thrown away on this. However, the benefit of that large-scale grant policy will be that many firms which would otherwise have been forced to liquidate will stay alive. These assets are not fundamentally valueless. The firm just does not have the ability to service them at a particular point in time. I would caution everyone against letting the market do its thing during a pandemic. It behoves the Government to support businesses that are in trouble at the moment. We should consider large-scale grant programmes to the extent that we can. We can have clawbacks and bring in equity releases later on. There are many details in the design of policy. As a basic measure, however, we should seriously consider large-scale grant aid to SMEs, particularly medium-sized enterprises, which in my view have been left behind.

I thank the witness. The ESRI's summer economic commentary made for very interesting reading. I was especially struck by the commentary on supports, namely, the Covid-19 pandemic unemployment payment and the temporary Covid-19 wage subsidy scheme. The report warned that ending these schemes or tapering them off would lead to mortgage arrears issues. I think the word "inevitably" was used. It also stated that savings resulting from this could aid recovery and prevent a temporary downturn from turning into something permanent. Will the witnesses elaborate on their views on when these schemes should be ended, given the Government projections predicting that 250,000 people who have lost their jobs during the Covid-19 pandemic will still be unemployed at Christmas this year, with many still unemployed in 2021?

Dr. Karina Doorley

It is true that the Covid-19 pandemic unemployment payment and the temporary Covid-19 wage subsidy scheme will need to be tapered off eventually. Let me start with the Covid-19 temporary wage subsidy scheme. At the moment, eligibility for this scheme is based on firm revenue. This contrasts with the UK scheme under which firms had to furlough their employees fully to benefit. The upside of this is that firms can continue to have employees work part time for them, meaning their skills do not depreciate and they contribute to the supply of goods and services while they avail of these schemes. This is good for employee retention in the long run.

The difficulty here is that withdrawing the temporary Covid-19 wage subsidy scheme based on the eligibility criterion of firm revenue creates a disincentive for firms to increase their turnover. That is certainly a situation that policymakers will want to avoid in any recovery scenario. The question is how to taper this off. One option is to proceed by sector, or alternatively to proceed in stages as the economy is reopening. The timing is difficult. Move too soon and some firms that may have been viable given a little more time will go under. Move too late and the dead weight and the cost of the scheme will really increase. The difficulties in withdrawing the scheme are mainly in the timing. I do not have an exact answer on when that should happen, but it will be critical in the design of a withdrawal.

I thank everyone for coming today. I have several questions for Professor Kinsella. I really enjoyed reading his paper. There are lots of interesting ideas there about a broader and fairer tax system and increasing and broadening the tax take, which I would like to dive into a bit more. Given the current financial situation, anything we can do to improve the country's finances is welcome. I notice that Professor Kinsella mentioned increased taxes on higher earners and property taxes. He also referred to decreasing taxes on capital gains to stimulate transactions. There is also a reference to reducing inheritance taxes on a one-off basis. I thought that was an interesting point. He suggests introducing a seventh VAT period in November and December. I assume that has something to do with the Christmas tax take. I would like to understand a little bit more about those three points.

Dr. Stephen Kinsella

I thank the Deputy. Some of the items on that list were intended to get money in now.

For example, we know January is a big month for VAT payments. VAT is paid every two months so there are six months in which VAT is paid for most firms. Introducing a seventh such month would move money that would otherwise be booked in January into that seventh month. It is a means of trying to prop up the 2020 revenue to a certain extent.

The idea behind temporarily lowering capital gains tax is to increase the number of transactions made and create turnover in the system. The idea behind a reduction in inheritance tax is to combat people simply waiting. The behavioural science, much of which has been sponsored by the ESRI and Professor Pete Lunn and his colleagues, shows that in conditions of increased uncertainty, people stop. They do not buy houses, sell properties, move businesses along or transfer farms. In that case, the State is starved of taxation revenue not because the economic need is not there or that there is not supply and demand but simply because of increased uncertainty. Those are my thoughts around it. We must consider things that could reduce the level of uncertainty or induce a kind of economic behaviour to increase the revenue that the State receives over this pandemic period. As the Deputy will be aware, this is a serious fiscal challenge. These measures may be effective or they may not.

I will follow up on one of the points that Dr. Kinsella made. Does the settlement on existing tax appeals mean doing a deal? Is that like an amnesty or how would it work?

Dr. Stephen Kinsella

Yes. I think the most recent estimate was that there are €3.7 billion of extant tax appeals. That money will come to the State eventually and it makes sense to me that we should look carefully at how we might do that.

The report from the ESRI stated that PUP leaves some families with more disposable income out of work than they had when they were in work and raised questions that we have talked about a bit already as to how we scale back the payment. I want to pick up on the phrase "careful consideration" that was used by Professor Barrett in his opening statement in respect of how to unwind the payment. There has been a lot of focus on a student who works one day a week in the local bar or at the weekend and is now getting a full PUP. There has been less focus on the fact that the same student might rely on full-time summer work which is now unavailable to fund his or her next year in college. Such a student could be pushed out of third level education without those funds. As was cited earlier, there are also many pensioners who were working to supplement their State pension before the Covid-19 crisis, were unable to avail of the PUP and struggled because of that. There are also people who will be unable to return to work after the Covid-19 crisis for multiple reasons, including childcare and so on. Poverty rates, and particularly child poverty, might increase. Can Professor Barrett unpack the phrase "carefully consider" a little? While being mindful of the precarious nature of much of the work with which we are dealing, what does careful consideration consist of and has the ESRI analysed how that relates to something like universal basic income?

I think Dr. Roantree would like to answer.

Professor Alan Barrett

I will answer the soft part of the question and leave the more technical and difficult part to Dr. Roantree. I will give an overview before I hand over to Dr. Roantree. The primary question the ESRI had about PUP was how good a policy this was in cushioning the incomes of people who were losing jobs. The answer was that this was a really good policy in cushioning things. If something is done quickly, there might be design flaws and if something is made to be generous, it could well be the case that certain people benefit from it at a level that they would not otherwise. On balance, to the extent that this was a positive social programme, it did a good job. The evidence that the institute presented was to the effect that very small numbers of people were doing incredibly well out of the payment. On balance, this was a very positive programme.

I will hand over to Dr. Roantree on the specifics of the tapering issue.

Dr. Barra Roantree

One thing that the ESRI has been highlighting is that the payment was particularly important in cushioning income loss for people who live alone, lone parents, lower income groups comprising people in the bottom fifth of income distribution and renters. Our research showed that the payment was particularly important for those three groups.

Other work that the institute has done and published in the past few weeks has shown that those groups spend disproportionately large amounts of their total spending on essentials, primarily housing costs and groceries.

One thing that we have been highlighting is that if the Government moves to a position where the PUP is reduced, tapered, or withdrawn, it might also be appropriate to look at increasing support for other benefits, and in particular, housing costs. The one that comes to mind and is designed for this very purpose is rent supplement. There was some increase in the generosity of that payment, which was due to expire, but it has been extended again. I do not believe that people are particularly aware this support is there and available to them and has been expanded. The details were not on the Citizens' Information Board website, or the Department of Employment Affairs and Social Protection website, until recently. It is these type of things that we are drawing attention to, in that if this payment is going to be reduced for the reasons that people raise about work incentives, or suchlike, then one might look at increasing housing supports, in a corresponding way.

I welcome the witnesses. This is a fascinating discussion but it is a pity that I only have five minutes to put some questions and have a discussion on these very important policy instruments and the impact that they are having. The ESRI has done incredibly important work on the cushioning provided by the PUP. The evidence is there and has been very important to inform the policy debate about the options we have at the moment in supporting people who have lost their jobs through no fault of their own, or of the businesses that have employed them.

Has the ESRI done formal modelling of the impact that the introduction of a two-tier PUP payment system would have on those who will be most adversely affected come the end of June? Are the witnesses of the view that the single-tier PUP system should have been maintained at least until such time as the sectors that have been most adversely affected have more have reopened in a more substantial way?

On the TWSS, Dr. Doorley made an important point that there are firms back up and running now that no longer meet the eligibility threshold. Have the witnesses a view on how the scheme should be tapered and how it may be reformed? We should seriously consider a customised tailored sector by sector, well-designed, short-time working scheme to try to assist employers dipping their toe in the market over the next few months to take people back on a short-term basis, as the economy continues to reopen.

On the national minimum wage, the Low Pay Commission will make an important recommendation to Government in the middle of July, as it is statutorily obliged to do. We know from evidence developed by the ESRI, and all of the international evidence, that small incremental, progressive increases to national minimum wages do not cost jobs. They have an impact on hours worked but they tend not to cost jobs. Have our witnesses a view at this point in time and have they done any analysis of the impact that an increase in the minimum wage may have on jobs and on particular sectors, given that there is a preponderance of women and younger people working in the sectors where the national minimum wage is most apparent?

I have a final question for both the ESRI and Professor Kinsella. As regards the massive subsidies that will be designed over the coming weeks, which are necessary to support certain economic sectors, are they of the view that this presents an opportunity for the State to attach important conditionality to ensure that key public policy ambitions get over the line, for example, respect for labour and environmental rights, and so on? Many other European states are taking this approach; we do not seem to be taking that at all. We have an opportunity to make our country better, and some conditions should be attached to the enormous resources that will be brought forward over the next number of weeks.

Professor Alan Barrett

I will make two quick remarks. I will then hand over to my colleagues, Dr. Roantree, on the PUP, and to Dr. Doorley, on the TWSS. The Deputy has done this horrible thing where he has asked six or seven different questions.

Deputy Ged Nash: Regrettably, we only have five minutes. I beg the Chair's indulgence.
Professor Alan Barrett: It is not so much the ability to answer the questions as it is the ability to remember them all. I will do my best. The Deputy's opening question, if memory serves, was on the level of the pandemic unemployment payment, the two tiers and so forth. One of the issues this has raised is whether our welfare system should have much more of an earnings-related component. We have this rather strange system in Ireland where payments are very much flat. This issue has been coming up in regard to pension payments for a very long time. If one looks at welfare payments in a whole range of other countries, there is much more of an earnings-related component. When we consider all the debate that has been spawned around making the payment €200 versus making it €350, maybe that is where we should roll it up. On the minimum wage and the effect there, I came at this issue from a very traditional training in economics, according to which increasing the price of something reduces demand. I had a very simplistic view of minimum wages until I saw the amount of evidence produced by colleagues in the institute and others elsewhere, which showed quite convincingly that modest and well-staged increases in the minimum wage did not have the sorts of effects that textbook theory would have suggested. As such, I have done a 180° turn on that one. As a result, if modest increases are suggested, from looking at ESRI work, not only have we been showing that they have not led to the sort of job losses that were envisaged, but they also have very positive equality impacts. I am much more in favour than I would have been had the Deputy asked me that question ten or 15 years ago. I will hand over to Dr. Roantree and then Dr. Doorley.
Dr. Barra Roantree: On the pandemic unemployment payment questions, we have not published any work looking at the tiered approach that is being implemented now. Our written submission to the committee last week includes a chart and section which looks at the work incentive issues created by the pandemic unemployment payment. It shows that having the flat-rate payment at €350 weakens the financial incentive to be in work for lots of people. We also flag in the submission that when public health measures are in place this is near irrelevant. It does not matter if there is not a financial incentive to work if one cannot go to work. It is relevant, however, and it should be carefully considered for the recovery phase. Determining how fast to do that is ultimately a responsibility for policymakers. What has been done to date does not address any of the work incentive issues because those who were getting a lot more under the payment than they got in work are now getting a little more than they got from work. This means they still get more than 100% of their earnings. The committee should focus on those who are getting between 70% and 100% of what they were earning. That group includes many better paid people. It does not include the people who have been highlighted. It constitutes a much larger share of the population. As such, there is a genuine issue that needs to be addressed, one which the changes made to date have not addressed. That is something the committee will need to work on. On the wage subsidy-----

I thank Dr. Roantree. Unfortunately, we have to move on but we will allow Dr. Doorley to contribute again later.

Deputy Gary Gannon: With regard to the debate mentioned by Dr. Roantree, including the question as to whether welfare payments are sufficient and the €350 versus €203 payment provided under the PUP, organisations such as the Society of St. Vincent de Paul have called for future welfare payments to be linked to the minimum essential standard of living. I would like to hear the views of either of the witnesses on that. This period is causing great fear because there is a threat of austerity. That almost all economists have taken the stance that austerity should not be needed and should be avoided during this period is welcome. For how long should we avoid any sense that austerity will be on the table? I raise this because the Society of St. Vincent de Paul published a report today highlighting not only the human cost of austerity but also its financial cost. We heard from the Society of St. Vincent de Paul today that the annual cost to the Exchequer of dealing with poverty is €4.5 billion. Poverty was compounded in many ways by the period of austerity. Do the witnesses believe the current view of economists will last or is it fragile and dependent on the markets?

Would Professor Barrett like to Dr. Doorley to respond?

All economists are comfortable, and it is part of the textbook learning, that while a deficit is temporary and there is an expectation that the natural forces in the economy will erase it, there is no need to move into an austerity period or anything like that. The nature of the downturn is very different this time compared with last time and interest rates are incredibly low. Moving into next year, I do not think there is a problem. However, most economists would begin to worry if there was no evidence that the deficit was going to be closed over time and that we would get into a situation where we were permanently running a structural deficit but that is not austerity, that is basic housekeeping. That is why there is now a consensus.

As a final brief point, the last time, austerity kicked in because no one would lend us any money. We have much more choice this time. I will hand over to Dr. Doorley.

Professor Alan Barrett: I will make a quick point. I will deal with the question on austerity and its duration first.

Dr. Karina Doorley

Linking welfare payments to some sort of index is something the ESRI always highlights in its post-budget analysis in October. When we do a comparison of what has been announced in the budget, we tend to compare it to what would have alternatively happened had the budget been indexed in line with either wage or price growth. That is a sensible comparison because we know that earnings typically increase year on year, unless we are in a deflationary period, as do prices. Comparing, for instance, the 2019 budget with the 2020 budget without changing the parameters of the 2019 budget to reflect the expected earnings or price growth in 2020 gives a somewhat distorted view of the budgetary changes. Linking welfare payments to some sort of index, be it wage indices, price growth or some sort of welfare index, is reasonable insofar as it prevents divergences in inequality. It would stop wage growth overtaking welfare payments. We saw that during that during the great recession when there were welfare cuts; when wages started to recover, welfare did not recover quite so quickly, which led to an increase in income inequality. This is an issue we tend to highlight in our post-budget analysis and there is some merit to it.

I thank both witnesses. Dr. Kinsella's paper noted that corporation taxes are a key risk to the State. How can we manage the vulnerability and volatility of corporation taxes?

Dr. Stephen Kinsella

First, they will be managed for us. There is a risk that we will lose some proportion of the corporate tax take through European digital tax changes. On the positive side, these revenues keep growing for various reasons. Viewing corporation tax receipts as temporary is wise and it suggests they should be used on things such as capital spending and paying debt down, or even pandemic unemployment payments. Increases in corporation tax revenue probably should not be used to pay for child benefit increases, which would continue on forever.

The other major aspect of corporation tax revenue is how quickly it has grown and to expect it to grow at that speed in the medium term would be fiscal folly. We should not do that, we got ourselves into trouble with that last time. To echo Professor Barrett's point, if the Government gets itself into the situation where it is taking in less than it is spending for a significant period, that is when we have austerity. I would define austerity quite differently to fiscal consolidation. Austerity is increasing taxes and decreasing Government spending in order to regain the confidence of the bond markets, where fiscal consolidation is where one pulls revenue and taxes together in order to ensure that one does not have to do austerity. I do not think that we will be in a situation where we have to impose austerity so long as we are very careful that the debts we build up now are used for highly productive purposes, rather than balancing the books on items such as public sector wages.

We will now move on to Deputy Boyd Barrett.

I thank the ESRI and Dr. Kinsella for their contributions.

As has been said, five minutes is too short to ask the questions one wants in a very interesting debate.

On the Covid payment and the income supports, do the witnesses agree that the talk of tapering off or even cutting the payment for those who are in receipt of it is folly at the current time or in the foreseeable future? The sectors that are going to recover are going to recover and people will go back to work, but the people who will lose out are those who will be unable to gain employment through absolutely no fault of their own. In fact they will specifically not be able to regain employment because of correct decisions the Government has made on public health measures, and their inability to return to work will be dictated by those Government measures. They are identifiable sectors such as tourism, aviation, taxi drivers, arts and leisure, and people who interact very closely with others. Is it not folly at the level of justice for those people but also from a macroeconomic point of view, because the more money they have in their pocket, the more it will boost demand at a time when we desperately need to boost demand in the economy to get things going and to keep things going?

The private sector has stopped investing to a very substantial extent. I would like Professor Barrett to comment on this. According to the Government there is a 37.5% fall in private sector investment, which is way out of line in proportion to the overall reduction in growth that is being projected. The corporate sector is saying it is not taking any risks or investing. Against that background we need even more stimulus at every level and the State must step in and compensate for the lack of investment that is coming for the foreseeable future from the private sector. That is against a background where public spending in Ireland was already way below EU levels, even coming into Covid, but against a background of collapse in private sector investment, surely there is an even greater urgency for heavy State intervention, State investment and to keep people's incomes up to ensure demand continues?

One last point in that regard is that while there are very obvious losers in the current situation, that is, workers in the industries I mentioned – arts, leisure, taxi drivers and transport - there are some winners as well. The pharmaceutical industry, the IT sector and financial services have been largely unaffected by this, as well as some of the big retailers and probably some of the big companies in the agrifood sector. They have probably done very well in the current situation. Should we not think about some taxes on the super profits they are making to redirect some resources towards those areas that need help?

Professor Alan Barrett

I will give a quick response. I am reluctant to say precisely at what level the pandemic unemployment payment, PUP, should be. That is ultimately a political choice. The role of analytical agencies such as the ESRI is to do things like calculate such parameters as the effect of a policy, the cost of it and who benefits. We try to provide that information, but ultimately it is up to this body to decide whether the PUP should be €500 a week, €200 a week or whatever other level.

Is Professor Barrett suggesting that? That is a good idea.

Professor Alan Barrett

No.

That will get the headlines.

Professor Alan Barrett

I am suggesting clearly that it is up to Members to make that decision. The important thing is that if the Government is going to keep it at €350 forever more, it does raise the question of why the minimum wage is approximately €10 and if that should be increased as well. There can be a series of interactions and the Government must ensure that, in a sense, policies are all aligned. One can make the case that perhaps the PUP should be €350 and the minimum wage should be approximately €20 an hour and that could be consistent, but it is up to the ESRI to point out where policies interact and where there might be difficulties.

On the point Deputy Boyd Barrett made about private sector investment, I agree it has collapsed, but this is precisely why all in the economics profession are talking about a vastly enhanced role for Government to borrow the sort of money that is required and to have a stimulus. It is a classic time for Keynesian economics, which is well and truly in fashion.

I call Deputy Shanahan who has five minutes.

I thank both of our guests. First, I will direct a few questions to Professor Barrett. Professor Cal Muckley of UCD has proposed a social progress indicator, in the Programme for Government, which measures both the quality and cost of State services. What are his thoughts on the matter? Will it be an effective tool? Will it ensure we can engage policy, as a result, to create the reform of costs in the public sector?

Professor Alan Barrett

Can I ask for a clarification on the question because I did not quite understand?

Professor Cal Muckley of UCD has proposed a social progress indicator, in the Programme for Government, to consider the costs and quality of public services. Does Professor Barrett, from his own point of view, think this is a measure that we can use to analyse the cost and delivery of public services?

Professor Alan Barrett

There has been a lot of discussion in recent times on what is measured by GDP, incomes and all these sort of things. If I have understood the question, I think this is moving in the direction where measures of well-being are increasingly sought in terms of evaluating policy. The best example is the French where the Macron Government has tried to develop these things as has the Prime Minister of New Zealand, Jacinta Ardern. Economists, as a profession, have become increasingly aware of this issue. I started writing papers, before I became the director of the institute, with titles including the terms mental health and well-being. In terms of the Covid discussion and the notion of public services post-Covid, that idea that we should try to maximise some measure of well-being is very relevant and is gaining traction. Professor Kinsella may have some bigger views than I on this matter.

Sorry, I rather hoped that this would be used as a measure of costs versus value; we will see how it develops.

Professor Barrett, at the end of his statement today, said that he foresees that an increase in the total tax take will be needed as the programme evolves over three years. Where does he see the tax heads landing? I ask because I think that corporation tax is going to drop because the profitability within the SME sector is going to drop and costs are going to rise.

Professor Alan Barrett

My earlier remarks to Deputy Boyd Barrett apply here. It is really up to this House to decide where the additional tax is. We simply pointed out what is an almost mechanical or arithmetic fact that so much of the discussion post-Covid has been around the enhanced role for the State in so many aspects of life. The logical extension of that is that if there is going to be a bigger role for the State then the tax take must increase. Again, the institute has tried to do its job in this area over the years where we have looked at various measures of taxation. We have tried to look at the economic impacts of various bits of taxation. Questions always arise such as whether, if one puts a tax on X, Y and Z, one will choke economic activity. We have done a lot of work over the years trying to get a handle on what taxes work and do not work. Ultimately, as I said, it is really a discussion for this House but I do not think it can be avoided. At the point when tax increases may have to be looked at, they should not be interpreted as austerity measures but should simply be interpreted as measures to expand the role of the State.

I thank the professor. I note that Professor Kinsella said in his opening remarks that we could run a deficit of up to €30 billion but earlier today Mr. Sebastian Barnes said it would be a maximum of €28 billion. Today, the National Treasury Management Agency, NTMA, has talked about refinancing some bonds that is has at 0% or 2%. How comfortable are we in a stable interest rate environment going forward? In other words, can we keep borrowing money at close to 0% or less than 2%?

Dr. Stephen Kinsella

For the short term, the answer is yes. By the short term I mean one to three years. The real risk comes when the money that we borrowed last week - €6 billion - has to be refinanced in ten years time. There is absolutely no model of what future interest rates on sovereign debt are going to be. If the stock of debt is very high and the economy is not growing then it is unlikely we will be able to refinance it in the future at the rates at which we borrowed.

Therefore, that kind of roll-over risk is there. The Department of Finance is alive to that risk and will do its best to manage in that context.

I have one more quick question to Dr. Kinsella. In his address today, he highlighted the work that was done between the University of Limerick, UL, and some commercial interests in terms of personal protective equipment, PPE, development, which I am sure was very welcome. I would highlight to him that Waterford Institute of Technology, WIT, has done something also with the support of commercial interests and the HSE. Perhaps he might consider having a look at that programme and endorsing it also.

Dr. Stephen Kinsella

I am big fan of universities getting involved in helping people. The example of WIT is salutary, as well as that of UL.

I thank all those who are with us today.

I note in his statement Professor Barrett states, "In the severe scenario the economic shock is even more stark with a second wave of the virus". If we have a second wave, should the country only shut down where the virus has struck worst or can we afford another national shutdown?

Professor Alan Barrett

I will give a straight answer to that. Everybody is now an epidemiologist. In the old days everybody was an amateur economist. Everybody is now an amateur epidemiologist.

There are so many of them around.

Professor Alan Barrett

I will try not to be.

Maybe from an economic point of view.

Professor Alan Barrett

One cannot divorce the two. Often things have been pitched as though there is economics on the one hand and public health on the other but many economists argued from the outset that an economy in which a virus is running rampant will not be a successful economy. As I have been hanging out with some epidemiologists as part of my work feeding into NPHET, I will break my rule.

Deputy A

They get all the fun.

Professor Alan Barrett

There is no doubt but we have learnt so much more about the virus, even in the past three months. When things kicked off in March, we really did not have a great understanding of this. There is still much we do not know. This notion of having much more targeted lockdowns came up in a discussion. One of the colleagues sitting around the table discussing epidemiology matters was making the point that when one has viruses in animals, it is clear that one locks down the group of animals and simply makes sure that they do not move around. At the time, it seemed inconceivable that we would think about a human virus in the same way we would think about a virus affecting animals but we can now imagine a situation where, geographically, in some shape or form, if a virus could be contained, it would be better to contain one part of the country rather than the whole country. We should be moving in a direction of having much more surgical lockdowns and surgical intervention to the extent that we can.

The tourism sector forms a considerable part of the economy in Ireland. While 11 million people visited us from across the world last year, this year it looks like it is the Irish market only. With the best will in the world, a population of just over 4 million will not be able to compensate the loss of 7 million visitors. Is it definite that tourism will take a massive hit leading to significant job losses and closures throughout the country? What would be the economic benefit of a 0% tourism VAT rate? If not a rate of 0%, how low can Ireland go without European approval?

Dr. Barra Roantree

Something we highlighted in previous work around budget time is that increasingly, economic research is showing that when VAT is cut, it tends to lead through to higher mark-ups for business owners. When VAT then goes back up, that tends to be passed on to consumers. That seems to be what economic research is now telling us happens. From that point of view, while a VAT cut might help stimulate activity in certain sectors, it might also lead to a permanently higher price level and that is something that is important to feed into the mix.

In addition, while VAT cuts are well targeted in terms of encouraging economic activity, at the same time, if there are many businesses which cannot engage in economic activity because of public health measures or because they are affected like that, those businesses will not benefit from a VAT cut. From that point of view, it is not particularly well targeted towards the businesses which are suffering most from the enactment of public health measures. One might stimulate tourism a bit by cutting VAT but at the same time there might be more targeted measures, for example, via the rates system or grants.

I am a little a bit cautious about advocating cutting VAT as a measure because there are some things that should be taken into account in the longer run. Such temporary VAT cuts have a way of turning into long-running VAT cuts, which then cause issues themselves.

SMEs, the hotel sector and many other businesses will need the wage subsidy scheme to be reinvented if they are to survive the Covid pandemic, however long it lasts. How does Dr. Roantree propose this should happen?

Dr. Barra Roantree

Perhaps Dr. Doorley can answer that.

Dr. Karina Doorley

I will deal with this issue and Deputy Nash's point about short-time work schemes in the longer term at the same time. There is a very good example of a short-time work scheme in Germany, the Kurzarbeit scheme, which is credited with helping Germany weather the great recession a lot better than some of its neighbours did. The idea is a little bit like the TWSS. Firms can adjust the number of hours their employees work in line with demand. They can make short-term adjustments to labour supply to match demand. This allows them flexibility. The Government then picks up part of the remaining wage bill. It pays for the additional hours people are not working. This scheme has been very successful in Germany. It does have some downsides. There are inefficiencies that can creep in. Employees are sort of tied to particular firms through this scheme, which may prevent reallocation to a more productive sector. Transforming the TWSS into something like a short-time work scheme might prevent employees who are working in sectors that are no longer viable looking for work, or retraining in order to work, in other sectors. The scheme has merits but it must be kept in mind that there may also be some long-term downsides.

It is nice to see some familiar faces who have appeared many times before the old Committee on Budgetary Oversight, which I had the privilege of chairing in recent years. To start with a slight aside, Professor Barrett made a throwaway remark that the ESRI is not projecting forward to 2021. As the primary and most respected body in this area - without meaning any disrespect to any of the other agencies involved in this type of work - is that appropriate? Will Professor Barrett justify that remark? Is he effectively saying that he believes the projections of other groups are not valid because there is no way to make such projections? Allowing for the structure of the ESRI and the funding it receives, does he believe it has an obligation to get into the saddle and do that work?

Professor Alan Barrett

That is a perfectly reasonable question. Let me put it like this: we have not made a projection this year so far. From memory, we were the first agency to come out with a stab at what this would do in 2020. We did our job at that point and did it well but, since then, we have taken the decision that the degree of uncertainty around a whole range of things means that we would question how meaningful any projection would be. As the situation unfolds, and certainly when we do our next quarterly economic commentary, we will present work for 2021. To refer back to something about which Professor Kinsella was talking, because we have a macro modelling capacity many other agencies do not have, I expect that we will carry out a more elaborate set of exercises and scenario analyses. That is just to set the record straight on that.

I am glad to hear that because we need that information. It might be wrong but that is the thing about projections; one takes that risk. It is, however, absolutely vital that work is done.

I will come back to certain issues that have already been highlighted. Professor Kinsella mentioned one of the primary ones. I worry that many of my colleagues, across the board, advocate spending and spending. We need to spend and I agree that a Keynesian approach is the right approach to deal with this but, as we know from many exchanges we have had over the years, the State is highly indebted. It has a real issue in that regard.

Perhaps Dr. Kinsella could answer this. I do not think it is a matter of years before the international markets will start to look at individual member states of the European Union and other states around the world and refuse to continue funding this unless they see meaningful adjustments to how the borrowing is taking place. The impact of that on this country would be catastrophic. Should we address the borrowing issue sooner than two to three years out to maintain our ability to borrow in the longer cycle, particularly to borrow at attractive rates?

Dr. Stephen Kinsella

The ECB this week said that it would purchase any and all assets required to keep bond yields as low as possible. As long as we stay part of a monetary union whose central bank commits to that, I think we will be okay. One to three years is appropriate for that. If we start pulling back on our borrowing too quickly, we create a gap between our spending and taxes. That necessitates very serious discussions about what programmes will not get funded. There is an important distinction between this time and the last time. Here, there is no moral hazard component. There is no "we all partied" view of things. The truth about it is that the virus has hit everybody. I do not think there will be a constituency for cuts of that kind. The Irish Fiscal Advisory Council is targeting fiscal consolidation after four or five years, which is probably appropriate. We get past the disaster phase, up to 2022 or 2023, and after that we begin paring back the level of stimulus. That stance is broadly appropriate assuming a V-shaped or U-shaped recession, which is what the real-time data are showing it might look like. While I agree that it is a timing issue, I would be very cautious about paring back the borrowing requirement now because it would necessitate fewer public services in the short term.

I agree with that and it is something I would like to see. I wanted to make sure that Dr. Kinsella and the ESRI are of the view that we have that capacity. It is vitally important that we spend now. The ESRI alluded to the necessity for an increase in taxes. Effectively, we are looking for an increase in the revenue derived from taxes. I think the most effective way of getting that is what we did last time, which was to grow the economy, getting people back into work and doing the policies which the Government is advocating. That will negate the need for a rise in the rate of tax. Is that something the witnesses could see as an effective way of dealing with the necessity to increase tax revenue?

Dr. Stephen Kinsella

Certainly over the medium term, yes. Over the short term, however, to speak to Deputy Boyd Barrett's point, there is a shortfall in private sector investment. We know from the work of Kate Ivory and others in The Economic and Social Review, which I referenced, that in the current environment investing in public resources would be very advantageous and would derive a benefit of twice what the Government spends. It is vital to look at this in its sectoral context. For example, if it looks like the tourism sector is going to be in trouble and a large-scale retrofit will be needed, maybe the State could provide grants to have tourism facilities upgraded while the downturn continues. It is possible to use the investment to transform the structure of the economy in the short term, which would be very good.

I thank Dr. Kinsella. I want to let Professor Barrett from the ESRI in before I run out of time.

Professor Alan Barrett

I will answer quickly. I was making a more fundamental point. As the economy grows and improves, more tax revenue will come in; there is no doubt about that. The point I was making is that in terms of the size of the State, by which I mean the proportion of gross domestic product, GDP, that is taken in tax revenue, Ireland is at the lower end compared with other states.

One reason is that we have, collectively as a society in some shape or form, decided to tax at a particular level and provide public services at a particular level, which is a perfectly legitimate, democratic decision that has been made. If there is a move to vastly enhancing the scale of our public interventions, and this is the point I was making about everything from education to childcare to basic incomes and so on, each of which has tremendous merit, the mathematical certainty is that we will have to raise our tax share to be in line with, for example, continental European countries. There is a big decision to be made.

I follow exactly what the professor is saying. The modelling of the impact of Brexit on the economy was done almost exclusively in the booming economy we had until the end of February, that is, with effective full employment, low inflation and everything going ahead. Has any modelling been done to try to show what impact a no-deal Brexit would have on a vastly more weakened economy in the current circumstances? Are the percentage figures for the potential impact mentioned earlier by our guests still realistic or is there a need to re-examine the potential impact of a no-deal Brexit on the type of economy we have now?

Professor Alan Barrett

For the modelling that is done at the institute, a macro model is used and the data that inform that macro model go back over a 30 or 35-year period. The modellers at the institute try to get a broader picture of the economy and the relationships therein. The results are presented in terms of what will Brexit will do relative to where the economy is at a point in time. We take a broader picture of economic relationships. One of the great challenges in doing such exercises is that the models work reasonably well for growth rates of 1%, 2% or 3%, or within what we might call normal parameters. This sort of economic modelling becomes very difficult when the structure of the economy has almost been changed overnight, so it will be difficult to conduct these sorts of exercises.

To return to the earlier point the Deputy raised, these are the sorts of considerations we will grapple with over the summer to see how we will modify the analysis to determine what Brexit will mean for the current economy. Only yesterday I was talking to my counterpart at the National Institute of Economic and Social Research in London. We hope to get together to conduct some sort of an exercise on this. Without doing the modelling, I can say it will be a frightening result, in summary.

Our guests from IFAC earlier made the point that at some phase in the course of this recovery, which should be phased out over the course of three years, there will be a need for increased taxes. The council made it clear that any new commitments that might arise will require reductions in other areas or there will have to be increased taxes. Professor Kinsella stated more or less the same, namely, that taxes will have to be increased. He gave consideration to increases in property tax, to introducing a wealth tax and to increasing taxes for higher earners. Will the professor elaborate on that? After Covid-19, who are the high earners? Can individual householders afford higher levels of property tax? As for the filthy rich whom everybody seems to talk about, who are they, where are they and how much tax do they pay?

Dr. Stephen Kinsella

Who are the wealthy who should be taxed? Many households over the past two or three months have actually saved quite significant amounts of money because they have not been going out or doing many activities. The savings rate across the world has been booming and Ireland is no different. Is there scope for people to pay more at the higher levels? Absolutely.

Who they are will be typed by sector. This is why this sectorial study, as I mentioned to Deputy Nash, will be important. Different sectors of the economy will need to be looked at carefully. I support the idea of a wealth tax because we do not really tax wealth that much in this country. Property is the main form of wealth in our economy. An expanded property tax would be better in terms of creating a solid tax base.

On higher taxes generally, I wrote my statement last week. The programme for Government, which was just announced, envisages a much larger State, not a temporary increase in the provision of the State, which is what the fiscal council was talking about. It envisages a much a larger, more permanent expansion of the State. That has to be paid for by either increasing the tax base or increasing the rate of tax which people currently pay. It is good and welcome news that there will be a commission on taxation and welfare in the upcoming programme for Government- if it is agreed of course. That is the place to have the conversation about how to pay for the larger State that many want.

In the medium term, we are talking about not having any tax increases. Is that possible while continuing to borrow at the current rate? Dr. Kinsella mentioned in his opening statement about increases in PRSI.

Dr. Stephen Kinsella

There will have to be tax increases for sure. The employer's PRSI rate is quite low in Ireland relative to our comparator set of countries in the OECD. There is certainly scope to increase taxes there.

Between the next two to four years, we will certainly see some tax increases. There is scope there. Again however, whether there is scope across the entire economy or whether there can be rebates and so forth is a matter for the Houses of the Oireachtas.

In his response earlier, Dr. Kinsella mentioned employers again, which takes us back to the chart on page four of his submission. It talks about SMEs in terms of the micro, the small, the medium and the large. It will be difficult if we are expecting employers to pay more taxes and recover at the same time, particularly when some are still recovering from the financial crash. Will Dr. Kinsella explain this graph to me?

Dr. Stephen Kinsella

That graph is taken from a Central Bank report. It is based on 2017 data, the latest that is available but quite out of date. There is a research requirement to get better data on the actual shape of the SME sector.

Many firms in many sectors have been minimally affected, relatively, by the crisis. The ones very badly affected have been in many respects supported and saved by the State. That is right, good and correct. However, given that the State is showing a tremendous level of solidarity with households and firms, it is not too much to expect that the State will require increased contributions to provide better services. It must be remembered we are not talking about paying off bust banks or odious debt to bondholders. This is about an increased and larger health system to deal with the pandemic as well as increased spending on education and higher education. As a friend of mine said, we are bailing each other out. That will need to continue over the medium term at least.

Some of the statements being made are on the solidarity between the Government and business. It is true that it exists but it is less true in respect of the micro-businesses throughout the country. They are still grappling with a huge debt. They are still grappling with the debt created by Covid-19. In the retail sector, for example, a business might be carrying stock worth €1 million that has gone out of season and it is expected to invest in the next lot of stock to try to keep its doors open. The same can apply in manufacturing. Manufacturers are trying to address Christmas markets now and are finding it hard to get started again because they are carrying a debt and the cost of raw materials. As the supports offered by the Government have had little positive impact on the retail sector, it is hard to see how the affected businesses can be expected to pay extra taxes. While it might be for the greater good, they might not be able to afford it.

I was quite shocked by the statement this morning, and by that of Professor Barrett now, on the analysis of the SME sector. There is poor analysis of what it actually is and how it is actually affected. Maybe the ESRI representatives will comment on that.

Professor Alan Barrett

The Deputy's question is actually quite interesting. Let me link the relevant points. Earlier the Deputy asked whether extra taxes, if imposed, should be wealth taxes or taxes for higher earners, and then he pointed, very understandably, to the notion that if the new wave of taxes is to involve increased employer contributions through PRSI, for example, it would have potentially damaging effects. One can certainly make that case, and it is quite understandable. Clearly, there are very large firms that could handle this but there are many smaller enterprises for which it would be quite difficult. Therefore, I understand the analysis, but if we agree collectively with the simple mathematics to the effect that if the State is to be expanded or extended in the sense that we will have to collect more tax — maybe we do not — we still have to come together and decide how we are to do that.

Maybe the Deputy does not agree with that but if for the purpose of discussion we take it that we are to have more tax revenues, wealth taxes are quite interesting in that there is a general understanding that they tend to have the least impact on economic activity. For example, if a worker is taxed very heavily he or she might work less, and if somebody who is consuming or investing is taxed he or she might do less, but wealth taxes tend to be what we describe as the least distortionary. Ireland is very unusual in having a very low level of taxation of wealth.

There is a great difficulty in this regard, on which I can forward the details. A colleague in the ESRI, Professor Martina Lawless, analysed this matter a number of years ago. She examined various wealth components and asked how broad the tax would have to be before there would be a meaningful revenue stream. The reality is that if housing is excluded, a wealth tax in Ireland will yield very little, but if it is included it will yield a lot. These are the issues we will face.

On the discussion on the interactions between taxation, welfare, employer PRSI and how we will fund enhanced welfare payments, living wages and all these sorts of things, it is really good that these subjects are going to be discussed by one commission on taxation and social welfare but I sometimes believe the pensions issue could also be part of the discussion to the extent that we might also be asking people, through auto-enrolment, to contribute more to their pension and asking employers to do more in this regard also. Therefore, there is quite a complicated blend.

Professor Alan Barrett

As other Deputies have said, we should be discussing this at considerably greater length, and maybe we will.

My first question is for Professor Barrett. Has the ESRI carried out any analysis recently of unsecured household debt?

Professor Alan Barrett

Not to my knowledge. I do not know whether Dr. Roantree or Dr. Doorley is aware of any.

Dr. Barra Roantree

As part of an ongoing project, colleagues who are not here today, namely, Dr. Conor O'Toole and Professor Kieran McQuinn, are considering the possible impact of Covid on rent arrears and housing costs.

That is yet to be finalised but when it is, it will be published.

I had a meeting recently with the head of the Money Advice & Budgeting Service, MABS. She talked about the possibility of a tsunami of household debt hitting people, especially from low income households, when the moratorium or holiday on rent, mortgages and other unpaid bills ends. It is an issue that will warrant some attention and we will have to figure out how we deal with that.

I have a number of questions about carbon taxes. I know the ESRI modelled this. One of Professor Barrett's colleagues, Dr. Miguel Tovar Reaños, was before the Committee of Public Accounts to speak about that modelling some time ago. The ESRI's position is that carbon taxes, without any counter-poverty measures, are regressive. In the analysis that the institute has done, if carbon taxes were increased by €10 per tonne, what carbon emissions reductions would that bring and how quickly?

Professor Alan Barrett

I will not be able to remember the precise figure. It will be simpler to forward the Deputy the work in time. The institute has been analysing this issue for approximately 20 years. We have always tried to ask what imposing carbon taxes does for the demand for energy-intensive goods or production processes, and what the effect on emissions will be. The answer is typically that carbon taxes on their own will not typically solve the climate crisis, but they are an important component in this.

I will hand over to Dr. Roantree in a moment because he has worked on this second matter. We have been aware for a long time that these taxes are regressive. The issue has always been how one designs the carbon tax such that the people who will lose are compensated in some shape or form.

We will get to that in a second because it is a different question from the one I asked. The figure that we were given was 3.7%, if the carbon tax was increased from €20 to €30 per tonne. A 3.7% reduction in carbon emissions would be substantial. The State did not experience any reductions in carbon emissions over recent years. As far as I understand, the ESRI's study did not include agriculture or industry but was basically about household emissions. Perhaps Professor Barrett will help me to understand what behavioural changes people could make that will bring about such a dramatic reduction on carbon emissions based on the modelling the ESRI has done if there is an increase from €20 to €30 per tonne, and then much more than that. We know that the vast majority of working families still cannot afford electric vehicles. We know that many people cannot afford deep retrofitting and cannot depend on public transport. Perhaps Professor Barrett will be able to explain what measures people and households will take that will see such a dramatic reduction in carbon emissions by increasing carbon taxes.

Professor Alan Barrett

Because I am not a direct author of the work, I might mischaracterise it, but let me draw the parallel. Carbon tax going from €20 to €30 per tonne is a 50% increase in the tax, which is substantial. One way the guys who do that work generate these results is by looking, for example, at petrol price changes over time. We have an experiment in the real world where the prices of energy are altered, partly petrol but also home heating oil and such, and we ask what the scale of the behavioural response is. My understanding is that those pretty large increases see reductions, whereby people might switch to public transport and may simply do less-----

I have one final question for Professor Barrett. I am struggling to understand this and I know this is a programme for Government issue that I do not want him to comment on. He said even a €10 increase would result in a 3.7% reduction in carbon emissions, which I do not see happening. If we increase the tax to €100 per tonne, which would be a dramatic increase over time, with €7.50 yearly increases, surely the State will take in less money from carbon tax.

Professor Alan Barrett

The Deputy is completely right in that the logic of carbon taxes is that, ideally, one would like to collect no revenue from them.

How is it, then, that we are anticipating taking in €9.5 billion? No adjustment is made in the figures I have seen.

Professor Alan Barrett

Is the Deputy referring to ESRI work?

No, I am referring to what is projected over the next number of years by the Government.

Professor Alan Barrett

I have not seen those figures and cannot comment on them.

Professor Barrett might take a look at them. I know his organisation is going to do a review on fuel poverty, which I look forward to seeing in due course.

I will try to confine myself to one question, if I can articulate it correctly. Earlier in the discussion, both sets of speakers had a conversation in regard to a stimulus or Keynesian type of approach to the situation we are in now. We know that we could be facing effectively a triple whammy in terms of the economic impact. The outworking of Covid-19, which Dr. Kinsella sets out very well in his paper, is dramatic in itself, but we also face the prospect of a no-deal or bad-deal Brexit. In addition to those two issues, Ireland could, as an open economy, be hit by other, international factors. The economy is particularly susceptible to downturns either in Britain or the United States.

Those three issues will impact on the entire economy, but there will be particularly severe impacts on some regions, especially those regions that are dependent on specific sectors. My constituency of Cavan-Monaghan is right on the Border, at the coalface of any outworkings in regard to Brexit, and is heavily dependent on the agrifood sector. In addition, the entire Border, midlands and western region is particularly and disproportionately dependent on the tourism sector. One can point to the regions that could take a dramatic impact as a result of the three factors to which I referred. The question I have is whether anybody can point to a type of stimulus package that would pinpoint those regions and ensure they are protected from some of the fallout. Does Dr. Kinsella or his colleagues have specific proposals that could inform the committee's work in this regard?

Dr. Stephen Kinsella

There has been a lot of really good work done on the impact of Brexit on a county-by-county basis, which could form the basis of a Brexit and Covid response. I would start there. To go back to my comment to Deputy Nash, there is a need for serious sectoral studies to be done, particularly in tourism, transport and aviation, to understand what those impacts will be. Then we will be able design a stimulus and have regard to the balance sheet effects that matter. There will almost certainly be large-scale grants, perhaps with some conditionality attached to them.

Professor Alan Barrett

To add to that, I remember that as the ESRI work on Brexit was coming through, there was a constant theme of regional disparity. Any time we looked at an average number for the effects of Brexit on the country, it was borderline meaningless because the distribution of those effects was so intense, especially in respect of the Border issues the Deputy raised. The difficulty is that we are well diagnosed in terms of the problem. Speaking for my profession, I often think that we economists are quite good at diagnosing problems but less good at surgical interventions that are going to make very significant differences and really help a situation. We agonise around things like dead weight, which we were discussing earlier, and how one gets relief or grants to an area whereby a certain proportion are not just going to result in dead weight. I often think that Deputies are asking the wrong people when they ask economists about this. People like those in Enterprise Ireland are much better in this regard because they have a much better understanding of SMEs at the ground level rather than at the data set level we carry with us.

Let me follow on from Deputy Cullinane's points regarding carbon tax.

We talked about the counties that will be disproportionately affected by the economic outworking of the three crises I mentioned. I imagine, and Dr. Roantree can correct me if I am wrong, that the same counties will be impacted by some of the proposals we heard in the past 24 hours, particularly the one on carbon tax. Would any of the witnesses give a view on whether it is sensible to impose a tax that disproportionately impacts on the regions that will be disproportionately impacted by Brexit, Covid-19 and international factors?

Dr. Barra Roantree

I might come in on that. We put out a paper last year in our budget perspectives series which examined precisely the options we might consider if we want to compensate households for the rise in carbon tax. The main point we make on carbon taxes is that the overwhelming economic evidence is that they work. They change behaviour and lead to reductions in emissions. That is something that-----

If alternatives are in place.

Dr. Barra Roantree

Yes. That has been the case and the experience in countries where carbon taxes have been increased. It is a necessary but not sufficient condition for the carbon tax to rise to address climate change. I believe that is the way most economists would see it.

The Deputy is right that the work we did showed that one of the groups that would pay most of a rise in the carbon tax would be people living in rural areas but commuting long distances. They were the group that would be particularly hit. We expected that electric cars would be the main way such people would respond to this. Now, however, it may be that working from home is a much more acceptable situation for most employers. In a way, Covid-19 might have brought about a solution that may not otherwise have been reached so quickly.

In terms of those who move out and those who cannot change their behaviour, if the concern is for the very poorest households, we pointed out that increasing social welfare rates at the same time as the carbon tax is increased can more than compensate most households. If between one third and one half of revenues that are raised by the increase in carbon tax are used to increase social welfare revenues, we will more than compensate the very lowest income households. There are real concerns about a carbon tax and its impacts on particular people or regions but those can be addressed and there are ways that have shown how to do that.

It is important to reflect that the programme for Government does not have proposals for substantial increases in social welfare payments.

I have two questions before I allow the real Chairman to contribute - I am only the Acting Chairman. On retail, the move towards online shopping in recent years has been evident, especially during the lockdown. We can all see the way An Post has reinvented itself with the number of packages it delivers. While that is great to see, there has been such a significant move towards online purchasing that footfall in the shops and shopping centres that have opened is down. People are worried about that. I am looking at it from the point of view of its effects as we move forward but also given that we seem to be moving towards a cashless society. Do the witnesses have any opinion on that?

Professor Alan Barrett

What is troubling about retail is that one has a sense that what might be happening is an acceleration of a process that was under way anyway. That seemed to be much more evident in the United Kingdom where one had the closure of the big retail outlets. It seemed that something was happening in terms of a changing pattern. That raises all sorts of concerns, especially for rural towns and villages. To be honest, this is a much bigger issue and it is quite a depressing one because when such a strong force is operating in a particular direction - this is more online shopping and the difficulties for towns, villages and even bigger urban centres - it is not entirely clear how economic measures or incentives can counteract what seems to be something that is much more fundamental. I do not have a cheerful answer to the question other than to say it was a pre-Covid issue.

Is the move towards a cashless society accelerating because of Covid-19?

Dr. Barra Roantree

The statistics from the Central Bank that have been published show that. They show that there has been a huge drop-off in people using cash and also the increased number of people using contactless payments. I have not touched my wallet in about three months. Everything is done on my phone now. As Professor Barrett said, Covid will accelerate trends that were already under way but it will accelerate them dramatically.

Professor Alan Barrett

There is an important social exclusion issue which is not really talked about. One of the joys of working in the ESRI is that one sees so many research reports coming across one's desk.

We did a report a number of years ago on that. It was not so much about people who were cashless but about people who did not have banks accounts and the impact on them. It was a larger number than people would have realised. I have wondered on occasion since then how all those people who did not have banks account are managing at a logicistical level.

A lot of the older generation use the post office and credit union in their own small town. They might not necessarily have access to banks which are predominantly in larger towns.

How important does the witness see the role of apprenticeships going forward? In the previous Dáil, I was Chairman of the Oireachtas Committee on Business, Enterprise and Innovation which looked quite closely at apprenticeships. Last year, we had 15,000 apprentices in Ireland who have come on mightily in recent years. Unfortunately, only 2% of them were female. Dr. Roantree spoke earlier about youth unemployment in those aged between 18 and 24 currently standing at 51%. There is a great opportunity here for young people to earn as they learn, which is what we learned about last year, and to move towards apprenticeships. In the programme for Government, if it happens, we are talking about retrofitting half a million homes over the next five years. There could be a huge move for apprenticeships to retrofit. Does Professor Barrett see that as a key role?

Professor Alan Barrett

Possibly, and I am going to make one point. I am conscious that I am in your line of sight so I am getting to answer all the questions. I better be fair to my colleagues who are elsewhere.

Professor Alan Barrett

When it comes to apprenticeships there are issues around infrastructure and those sorts of things, but the biggest issue is cultural. By that, I mean the notion of apprenticeships being some sort of second class citizen in our educational infrastructure, and the role of parents in saying to their kids that this is a good thing to do and not everybody has to go to Trinity College, UCD, University of Limerick or wherever else. That cultural point, in many ways, is as important as the nuts and bolts of basic provision.

Thank you, Professor Barrett. Professor Kinsella, would you like to comment?

Dr. Stephen Kinsella

I would agree with Professor Barrett. I spent a fair amount of my time on the board of the Higher Education Authority arguing for a deeper connection between further and higher education. We have apprenticeship models working in the University of Limerick and across most of the universities. It is early days to say whether they have been successful or not, but the more of these kind of throughputs we see, the better. Ireland has a low level of lifelong learning, for example, so it would be good to use those further to higher education, and indeed, higher to further education links. The stronger they are, the better we will be, especially in terms of things like the large retrofitting Deputy Butler rightly talked about.

To conclude, Deputy McNamara has five minutes.

Professor Kinsella is quoted in the The Clare Champion almost a month ago saying the V-shape is looking very aspirational at this point. He stated the Department of Finance said that in 2009 GDP grew by 5.5%, this year it will fall by 10%, and next year it will grow by 6%; that is a V-shaped recession. He went on to say that the chances of that happening seemed low, but anybody that pretends to know is talking out of their hoop. Does Professor Kinsella have any more information at this stage on which he might base predictions?

Dr. Stephen Kinsella

The most important thing, and perhaps less colloquially than I might have put it to the esteemed journalist at The Clare Champion, is that we exist in a high degree of uncertainty. That is why scenarios are developed instead of forecasts because, quite simply, the models will not work for the amount of uncertainty we have. When one sees a situation with this much uncertainty, it behoves the State to step in to try to reduce that level of uncertainty, which is why we are all talking about the activist fiscal policy.

The other major point is if we have a situation where a V-shaped recession is looking unlikely, we must study the risk that it may be a longer-running recession. It may be U-shaped, and there may be sectors that are deeply damaged. Frankly speaking, we do not know, which is why in my written submission I argued that I hope for a strong research response to what exactly those risks are.

To both the ESRI and Professor Kinsella, what impact will bank lending practices have on what happens now regarding what type of recession we have, or whether we have one or not? Are the witnesses seeing any changes or trends in bank lending practices?

Anecdotally, I am hearing many stories of loan offers being withdrawn. That is anecdotal, however, and I do not have anything concrete on the subject. Do any of the witnesses have any concrete information on that issue, and, even if not, what impact will there be on bank lending practices?

Professor Alan Barrett

We have not done any formal analysis of that issue in the institute but the Deputy's question brings me right back to the economic crisis of 2008 to 2010. Regarding bank practices then, it will be remembered that there was a thin flow of credit and a discussion of whether that resulted from the supply or demand side of the process. That eventually worked itself out. There is no doubt, however, and this is partly related to Government policy, that proactive lending by banks into the economy is going to be an important part of the overall recovery.

Banks are businesses, though, and must show degrees of caution. That is clear, and again brings up the importance of State guarantees regarding these loans. It is a critical dimension. Ireland still seems to be a bit unusual in that SME enterprises are still very bank-oriented in their reliance on that sector for finance. Many other countries have changed that model. There was much effort in recent years to move our model away from being so bank-focused but we are not anywhere near far enough along that road to state anything other than banks are going to be critical.

Does Dr. Kinsella have anything to add?

Dr. Stephen Kinsella

I think this issue will come down to turnover. A business is not going to take out a loan if it is not sure that it can service that loan. Similarly, a bank will have a concern about whether a firm that has demonstrated recent low turnover will be able to service a loan. The intermediary between the two is the State. The question concerns the appropriate design of those guarantees.

Germany is a good example in this area but there have been many credit guarantees and credit injection programmes across the OECD, some very extensive. We could benefit from looking at those examples but with the proviso that firms do not know what September, October and November are going to bring regarding their turnover. Firms, therefore, are going to be very unlikely to want to take out loans, unless they are, in some sense, guaranteed by the State.

I thank our witnesses for their time. We will suspend the committee until 4.30 p.m., when we will meet representatives from the Departments of Employment Affairs and Social Protection and Public Expenditure and Reform concerning the impact of Covid-19 on the fiscal position.

Sitting suspended at 4.05 p.m. and resumed at 4.30 p.m.
Deputy McNamara resumed the Chair.