Ministers Paschal Donohoe and Michael McGrath will reveal the budget for 2021 less than three weeks hence on 13 October. A medium-term economic plan is to follow in November.

Key elements of the budget have already begun to emerge. There will be no increases in income tax, the Universal Social Charge, PRSI or residential property tax, all ruled out in recent ministerial statements. There is pressure to concede further reductions in VAT, to follow the cut in the top rate from 23% to 21% announced as part of the July stimulus package. The 23% rate applies mainly to imported items, including motor fuel and consumer electronics, as well as champagne and caviar, so it is not clear whose economy was being stimulated.

Deficit

The budget deficit for 2020 will be somewhere between €25bn and €30bn. A further large deficit is inevitable for 2021 and Minister Donohoe has been hinting at a figure at least half the out-turn for the current year. The gross debt of the Irish State will be somewhere around €250bn at the end of next year, versus €204bn at the end of 2019.

This is a sharp increase on a figure already high by comparison with other Eurozone members and officials at the Department of Finance will be wondering about the sustainable level of national debt for Ireland. Just 10 years ago the State lost its capacity to borrow and was forced into an IMF programme for the first time in its history.

Every European country is suffering from the COVID downturn, it is nobody’s fault, and the European Central Bank has learned from its mistakes

Ireland managed to mismanage its public finances during the bubble period and contrived a far larger banking bust than arose elsewhere in Europe. There was little sympathy for the mess the Irish got themselves into and the European Central Bank was consistently unhelpful.

This time it’s different. Every European country is suffering from the COVID downturn, it is nobody’s fault, and the European Central Bank has learned from its mistakes.

Borrowing heavily

Governments all around Europe are borrowing heavily, the European Commission has suspended the rules that place a ceiling on government deficits and the ECB is keeping borrowing costs low through its willingness to buy government bonds in huge quantities. So long as this regime remains in place, any eurozone government, including those already heavily in debt, should be able to run large deficits without problems selling bonds.

It is likely that 2021 will be a year of limited recovery in Europe

The questions to ponder in framing the budget for 2021, and the economic plan in November, are straightforward: how long will the current eurozone dispensation last, and will member states all face the same conditions when the post-COVID era commences?

It is likely that 2021 will be a year of limited recovery in Europe, even if a vaccine becomes available, and that 2019 levels of economic activity will not return until 2022 at the earliest. There are grounds for expecting that recovery could take even longer.

Could it possibly be true, as so eagerly canvassed by instant experts in macroeconomics, that zero-cost government borrowing is here forever?

If so, the era of free money is upon us and there is every reason to celebrate the dawning of a new and bounteous era, a nation enriched by the arrival of a deadly virus.

There must be a snag. After all, nobody can print US dollars without attracting the attention of the authorities

No soft option must ever again be dismissed on the grounds of cost, since there is no cost. The Irish State can create, in a hard currency (the euro), unlimited spending power through the simple device of issuing promises to pay. There must be a snag. After all, nobody can print US dollars without attracting the attention of the authorities.

The suspension of the EU deficit rules is temporary and will be discontinued as soon as the COVID-19 emergency is seen to have passed. The same goes for the ECB bond-buying programme.

One way or another, the prospective deficits likely over the next few years will have to be temporary

To persist in these two policies as the European economy enters a real recovery would invite the return of inflation unless governments were willing to tighten budget policy to stave it off.

Should they fail to do so, the ECB will stop buying bonds and that means no more large deficits for countries like Ireland. One way or another, the prospective deficits likely over the next few years will have to be temporary, barring a pan-European willingness to tolerate a return to wholesale inflation and the ruination of creditors.

Foolish

Since that would be a foolish horse to back, the Irish Government will, in November’s economic plan, commit to a gradual return to budget balance as the COVID emergency passes. The budget for 2021 will be the first step in that process and the siren voices calling for unlimited public expenditure will not be appeased.

Any eurozone country with heavy debts will be expected to manage the epidemic with competence and to acknowledge the need for budget discipline. Failures in either task risk punishment down the line.