On Wednesday, the Government published the Summer Economic Statement, setting out the State’s medium-term budgetary strategy and outlining the fiscal parameters within which discussions will take place ahead of Budget 2022.
The statement was due to have been approved by Cabinet on Tuesday, but agreement was not reached on its contents, hence the delay. Fianna Fáil Ministers pressed for a substantial increase in capital funding for housing, which will be included in the ‘Housing for All’ plan to be released next week, while Minister for Finance, Paschal Donohoe, for his part, wanted to enshrine a commitment to deficit reduction in the document.
On Thursday morning, while presenting to the Oireachtas Budgetary Oversight Committee, Minister Donohoe said that “as the private sector and the broader economy begins to recover, it will be necessary to roll back the temporary supports so as to prevent the economy overheating.” To date, more than €8 billion has been spent on the Pandemic Unemployment Payment, over €6.5 billion on the Employee Wage Subsidy Scheme/Temporary Wage Subsidy Scheme, and almost €650 million on the Covid Restrictions Support Scheme.
In summary, the fiscal framework “is one that stabilises our debt ratio, gradually reduces the budgetary deficit, supports households and firms, and invests in our future.” A budget package of €4.7 billion is envisaged for Budget 2022, of which €1.5 billion will be for new measures. A further €2.8 billion has also been set aside for Covid-19 related income and business supports should they be required.
In keeping with Minister Donohoe’s comments earlier in the week, the Government’s stated budgetary objective is “to stabilise and even reduce slightly, the debt-income ratio over the coming years. To achieve this, Government will more closely align revenue and expenditure, while allowing for the deficit to reduce in line with the economic cycle. In order to do this, the Government is setting an expenditure rule whereby core (non-Covid) expenditure growth is fixed at the estimated trend growth rate of the economy.”
Ireland’s public debt ratio is now among the highest in the developed world, and is due to exceed a quarter of a trillion euro next year. Minister Donohoe told the Budgetary Oversight Committee on Thursday that “such a large debt burden increases our vulnerability and depresses the living standards of future generations.”
The Government hopes to reach a headline deficit in the region of -1.5% of GDP by 2025, though intends to get there incrementally in order to allow for continued investment in capital expenditure to meet the goals of the National Development Plan and Programme for Government. By 2023, the Government will only borrow for capital investment and accordingly, they will be “responsibly phasing out the range of temporary support schemes to allow resources to be directed at key national priorities.”
Yesterday, the Central Statistics Office reported the economy grew by almost 6% in GDP terms in 2020 – one of the strongest levels of growth seen anywhere in the world and up 2.5 percentage points on first estimates. Accordingly, like the European Commission’s Summer Economic Forecast and the Central Bank’s most recent Quarterly Bulletin, the Government revised its economic projections upwards, predicting GDP growth of 8.75% and €1.6 billion for tax revenue this year. Modified Domestic Demand predictions remain unchanged from the Stability Programme Update (SPU) at 2.5% this year and 7.5% next year. The deficit projection, however, is also higher due to additional expenditure to allow for continued investment in housing and other critical infrastructure.