News

Watchdog says Irish economy likely to 'bounce back quickly'

Watchdog says Irish economy likely to 'bounce back quickly'

The Fiscal Council's latest report assesses the Government’s medium-term forecasts in its Stability Programme Update (SPU) 2021.

The economy is likely to bounce back quickly as restrictions ease and as vaccines are rolled out. The Government’s relatively cautious projections assume deep scarring on the post-pandemic economy, yet the council sees more upside potential to growth.

The government deficit should narrow as the economy recovers and temporary measures are phased out. Support measures for the economy should continue in an appropriate form as long as needed.

However, the Government needs to set out a credible medium-term strategy. The official budgetary forecasts are poorly founded, major policy commitments are not built in, and the promised medium-term strategy has not been delivered by the Government.

Advertisement

Adjusting the projected budget balance in 2025 from the SPU for the full cost of providing existing policies, more coherent income tax assumptions, corporation tax risks, and aligning it with the Capital Plan, the budget balance would be around 1.2 per cent of GNI compared to 0.3 per cent in the SPU.

Debt ratio

Ireland will need to bring the debt ratio to safer levels from 2023. To achieve this, some modest or no adjustment to existing policies may be needed.

However, the €5.4 billion of unfunded permanent increases in spending introduced in Budget 2021 have largely committed the benefits of future growth. This leaves no room for new policy measures unless taxes are increased or spending is adjusted elsewhere.

Commenting on the report, the chairperson of the Fiscal Council, Sebastian Barnes, noted: “The absence of well-founded medium-term plans and fiscal targets leaves the public finances unanchored. Ireland needs a plan to meet the challenges in the coming years from international tax changes, climate change and ageing, while implementing major policies like Sláintecare.”

Advertisement