The devastating impact of the Coronavirus on the economy will be laid bare to the Oireachtas Covid Committee tomorrow, with members to be told that Ireland is facing a deficit of €30 billion.
The Irish Fiscal Advisory Council is to advise that an adjustment of up to €14 billion will be needed to restore the public finances to balance.
While it said this could be done over several years, it warns that to achieve this situation will require “difficult decisions” by the government.
“This does not mean a return to severe austerity. Fiscal adjustment is the need to freeze or cut spending or to raise revenues. Some upward and downward adjustments — either in aggregate or on specific items — are a
normal part of budgetary management," Sebastian Barnes, IFAC chairman will tell committee members.
“The adjustment could be achieved, to a large degree, by growing spending at a slower pace than the economy grows. We do not expect austerity in the sense of significant increases in unemployment due to severe fiscal adjustments taking place in a downturn,” he will say.
However, Mr Barnes said Ireland is vulnerable given our already high debt levels.
“With a very high debt ratio, Ireland will ultimately be much more vulnerable to future changes in interest rates as large amounts of funding will likely be required for new borrowing in the coming years and to rollover existing debt.
"This is why it will be important to use the current positive debt dynamics to bring debt to a safer level,” he will say.
Alan Barrett, director of the Economic and Social Research Institute (ESRI) will warn that his body estimates that the deficit for this year will be 9% or €28 billion in cash terms.
The ESRI’s ‘medium’ job loss scenario (600,000) with the PUP (pandemic unemployment payment) in place is estimated to cost the exchequer €4.9 billion per quarter, around €800 million more than a situation in which the existing system of welfare supports remained unchanged, he will say.
“We expect a fiscal deficit to remain in 2021 even in the context of a likely recovery. From a policy perspective, on-going borrowing to fund such a deficit will be the correct option. The key consideration here is that borrowing is appropriate in the context of a temporary deficit which is likely to be closed as the economy grows,” he will say.
“It will also be advisable to borrow for investment under a stimulus package. With interest rates close to zero, such a course would help to reboot the economy while also tackling some of the infrastructural needs which are well-understood,” he will add.
Prof Stephen Kinsella, an economist at the University of Limerick, will deliver a more pessimistic outlook — predicting a “large fiscal deficit in excess of €30 billion” which he said is “unavoidable for 2020.”
He will say stimulus measures should be significant, up to 10% of modified Gross National Income, or some €20 billion, including measures announced to date. Much of this spending should come from funds linked to European programmes.
He will also call on the committee to look at what impact a return of the virus could have on the economy.
Robert Watt, Secretary-General of the Department of Public Expenditure and Reform will tell the committee that at the end of May, the Covid-19 adjusted monthly unemployment measure produced by the CSO showed the unemployment rate at 26%.
In these exceptional circumstances, the Government has taken significant steps to cushion, where possible, the impact on households and firms, he will say.
He will say that the Government is forecasting a deficit of €23 billion but it could go as high as €30 billion if there is a delay in re-opening the economy.