OECD to new govt: Don't worry too much about sovereign debt build-up at this stage of Covid-19 crisis

The new Government should have no hesitation in re-introducing the full range of supports should a second wave of Covid-19 crash over the economy.

The new Government should be in no rush to cut back on the Covid-19 public unemployment supports needed by around one million people and need not overly worry about the build-up of sovereign debt, at this stage of the crisis.

The reassuring message for the new coalition comes from Ben Westmore, who heads up the Ireland desk at the Organisation for Economic and Co-operation and Development.

However, in an interview with the Irish Examiner, the senior economist said it was “slightly” more concerned about the prospects for Irish employment after fewer than expected people migrated from the pandemic unemployment payments onto the wage-subsidy scheme or back into regular employment, even as the restrictions lifted in recent weeks.

Mr Westmore said the OECD wasn’t surprised at the uptake in pandemic unemployment payments but that Ireland looks “a bit slower” than other countries are in coming off similar welfare payments. 

It was “difficult to compare countries, but at the margin, we are slightly more concerned” about the implications for longer-term scarring of employment here, Mr Westmore said.

He said the pandemic unemployment or similar supports may be needed to run for some time and was conscious of increasing talk in many countries about the buildup of public debt and the talk about reining in spending.

However, the OECD would warn against acting prematurely, “because Ireland is facing a pretty big hit in terms of demand in the economy and measures to support the recovery are going to be needed for some time”, Mr Westmore said.

“We all understand what happened to Ireland last time with the last financial crisis but we would advise that all governments should not be too rushed to return to consolidation and during this life support stage,” he said.

The new Government should have no hesitation in re-introducing the full range of supports should a second wave of Covid-19 crash over the economy.

“If you did have a second wave that required full containment measures, the Government should have no hesitation but to put back those schemes and re-enact them,” he said.

Under any second wave, a new Government should behave in the same way when the first wave hit “and should not be concerned about the deficit that may be run up”, he said.

“It is not that the sovereign shouldn’t stop worrying about it, but during this stage, not doing enough is a much worse strategy than doing too much in terms of stimulus in terms of the scarring effects on employment in future years,” he said.

With low-interest rates likely to be sustained, the debt dynamics in Ireland look likely to make an increase in sovereign debt manageable.

On the stimulus package, he said the OECD was agnostic between measures such as governments providing 100% credit guarantees or taking equity stakes in companies.

He said that evidence suggests that giving cash payments to low-income households could be effective and “more broadly”, spending on social housing and increasing access to universal healthcare ought to be considered.

Delaying temporarily the increase in the State pension age may be required, but an ageing Irish population will require reforms at a later stage, he said.