Marketing

Covid-19: Why heavy borrowing is different now than during the crash


In the current crisis, most economists have recommended that governments should borrow heavily to support their economies. This does not reflect a change of heart from the crisis a decade ago: rather, it is a recognition that the circumstances this time around are very different from 2009 and 2010.

Between 2007 and 2013 the national debt rose by more than €130 billion, just in excess of one-third of it to bail out the banks, and the rest to fund everyday services. By contrast, current expectations are that the Government will end up borrowing something more than €30 billion in the current crisis. Thus, provided that the EU economy recovers as expected, the funding requirement of the Irish Government is much smaller than the last time, making borrowing feasible without endangering the long-term financial stability of the State.

Thanks to the action of the ECB, a second difference from a decade ago is that interest rates are exceptionally low, whereas for the State in 2010 they were prohibitive. Thus, while the substantial borrowing today will be a charge on future generations, it will not be a very heavy charge.

The third reason for borrowing is that, while the Government is borrowing 10 per cent or more of national income this year, the household sector is saving at almost the same rate because it cannot get out to spend its income. The collapse in consumption and investment will mean that the economy will be producing well below its capacity and a stimulus to make use of that unused capacity makes sense. The problem this year is that the stimulus is, of necessity, being saved by households and only when we get nearer to pre-Covid-19 normality will that stimulus have its full effect.



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