‘Sev ere austerity won’t be needed’ – State is urged to spend big during recov ery
THE Government will need to spend billions of euro over several years to support the economy but there is no need for a return to austerity, according to the State’s budget watchdog.
In its latest budget assessment, the Irish Fiscal Advisory Council (IFAC) says that even though the public finances will be stretched by Covid-19 spending, there is no need for a return to the “severe austerity” of the post-crash era.
For years, it has warned about overspending by government, however it now says a “sizeable fiscal stimulus” will be needed to help the economy recover.
It estimates that in the year to April, the economy contracted by a fifth as businesses closed to prevent the spread of coronavirus and more than half a million people lost their jobs, pushing unemployment to a record high.
“Actions so far to tackle the immediate economic crisis have been appropriate and those supports should remain in place as long as needed, although the measures may need to evolve over time,” Sebastian Barnes, who is the council’s acting head, told journalists in a video call.
“During the recovery phase, a sizeable fiscal stimulus will be needed to help support activity,” he said.
Taoiseach Leo Varadkar and Finance Minister Paschal Donohoe have repeatedly warned that some of the pandemic payments will need to be reined in and that rapid action will be needed on the deficit to avoid austerity.
So far, the Government has budgeted around €7bn in extra spending on health, wage supports and support for companies, with an additional €7bn available in loans and
grants. The budget deficit this year is set to hit 14pc of gross domestic product after two years in surplus.
The IFAC believes that budget spending will need to remain high as the economy moves out of the immediate shock, and although it could not give a precise figure for the extra spending needed, it pencilled in €10bn as an example to show that the stimulus would need to be substantial.
The budget watchdog expects the economy to start moving into a recovery phase in 2021 and 2022 when it will still need budget support from Government coffers and then into a ‘new normal’ phase between 2023 and 2025, when the process of consolidating the budget could start.
Given the uncertainties over a potential second wave of infections as the lockdown is eased and the uncertain outlook for the economy, Mr Barnes said it was impossible to chart a precise path for Government finances.
“It is important that support continues as long as it is needed and it would be counterproductive, I think, to draw it back prematurely,” he said.
By 2021, the ratio of government debt to the economy’s output could be approaching crisis-era levels at 160pc of modified gross national income, a measure used by statisticians to estimate the size of the Irish economy.
The budget will still be in deficit of 3pc of gross domestic product by 2025, the IFAC projects.
Despite the colossal deficit, the pace of budget consolidation will only need to run at roughly half the annual rate of the post-crash as the Irish economy will be growing once again and ultra-low interest rates mean that, despite a rise in debt, the bill for government debt will actually fall.