The Minister for Finance, Paschal Donohoe TD, today (Wednesday) published the Government’s Stability Programme Update for 2021. This document sets out the Department of Finance macroeconomic and fiscal forecasts for the period 2021-2025. The macroeconomic forecasts underpinning the SPU were endorsed by the Irish Fiscal Advisory Council on 7th April (a legal requirement).
Commenting on the figures, Minister Donohoe said:
‘The publication of these economic and fiscal projections means that we now have a medium-term trajectory against which Government can assess and benchmark the evolving situation and calibrate policy accordingly’.
“The speed at which the economy can recover will depend on the success of our vaccination programme. This is being significantly ramped-up in the second quarter, and should allow for a more significant but cautious easing of containment measures over the summer. This will allow for a substantive and sustainable recovery to begin.
“My Department is projecting that Modified Domestic Demand – the best indicator of economic trends – will increase by 2½ per cent this year, accelerating to 7½ per cent next year, as pent-up consumer and business demand is released. Excess household savings, built up during the pandemic, will be partly unwound, further supporting spending.”
The economic fall-out from the pandemic is most evident in the labour market. The Department is projecting an average unemployment rate of around 16¼ per cent this year, before declining to 8¼ per cent next year as the economy is fully re-opened. The level of employment is projected to increase by around 80,000 this year and 225,000 next year, although the level of employment will still remain below its pre-crisis peak until 2023.
On the fiscal front, the Government has deployed its balance sheet to support workers and firms and to cushion the impact of the pandemic. After a deficit of 5.0 per cent of GDP last year, a further deficit of 4.7 per cent of GDP is in prospect for this year. As a result, public debt has increased from €204 billion immediately pre-pandemic to an estimated €239 billion this year or 112 per cent of GNI*. As the economy recovers next year, the deficit will improve to 2.8 per cent of GDP, with the debt ratio falling to 107 per cent of GNI*.
On the public finances, Minister Donohoe said:
‘We are projecting an improvement in the public finances next year. There are, however, clear downside risks for the public finances. In particular, international corporate tax reform could weigh more heavily on this revenue stream than is currently assumed. Having said that, the public finances are in a much better position to absorb the expected shock to corporate tax revenue than, say, a decade and a half ago. The tax base is much wider than prior to the global financial crisis and, importantly, there is time to build up the resilience of the public finances before international reforms move to the implementation phase’.
Minister Donohoe added:
‘The impact of the pandemic on the domestic economy and the public finances has been severe. However, the acceleration of the vaccination programme means that the beginning of the end is, hopefully, now in sight. The strength of our economic model and more importantly, our people, clearly demonstrate that we should face this current period with optimism. We can and we will rebuild our economy, get our people back to work and safely emerge from the pandemic.”
Minister for Public Expenditure and Reform, Michael McGrath said:
‘Across 2020 and 2021, we have provided over €28 billion for various Covid related spending programmes, nearly half of which are direct income supports via the Pandemic Unemployment Payment and Wage Subsidy Schemes. This represents real cash in people’s pockets to mitigate the effect of an unprecedented health emergency. I believe the underlying strengths of the economy give us cause for optimism that there will be a very considerable recovery in our economic fortunes starting in the second half of the year. This will help get thousands of people back to work, improve tax receipts and reduce Covid related expenditure’.
“The Draft SPU charts a course for an orderly reduction in the deficit which has arisen due to the essential programme of spending we have undertaken in response to the Covid pandemic. We will continue to invest considerable sums in much needed capital projects through this period, and I look forward to the conclusion of the review of the National Development Plan in the coming months which will involve setting out an ambitious capital investment programme out to 2030. In the immediate term, the government will honour its commitment that there be no cliff edge end to the economic supports at the end of June. We are conscious that continued support will be required to assist sectors of the economy on the path to recovery and we will set out these plans in the coming weeks.”