The Central Bank has warned that the coronavirus crisis is likely to blow a €22 billion hole in the State's finances and could see half a million people losing their jobs.
In its latest quarterly bulletin, published on Friday, it says lost tax revenue and increased spending on various support schemes will see the exchequer move from a €2.2 billion surplus to a €19.6 billion deficit this year.
It predicts the crisis will lead to the loss of up to 500,000 jobs as the economy shrinks by 8.3 per cent.
And it warns the outlook could be even worse than this because its forecast is based on a three-month containment period. If measures to contain the virus were to be extended, the forecasts would become more negative.
The Central Bank's warning comes a day after the Central Statistics Office said the number of people claiming jobless benefits or wage subsidy in the Republic tripled to more than half a million in March.
The latest Live Register figures indicate that an additional 330,000 people registered for benefits or income supports last month, bringing the seasonally adjusted total to an all-time high of 513,350, more than a fifth of the labour force.
That is higher than the peak seen during the global financial crisis nearly a decade ago.
The new total, however, includes those being paid the new pandemic unemployment benefit or those in receipt of the Government’s new Covid-19 wage subsidy, many of whom can expect to return to work once the economic restrictions are lifted.
Exchequer returns, also published by the Department of Finance on Thursday, showed meanwhile that tax receipts for the first quarter of 2020 were €800 million lower than expected, primarily due to a collapse in VAT returns. The sales tax brought in more than 50 per cent below the total expected for the month of March as consumer spending plummeted.
Minister for Finance Paschal Donohoe warned that Government tax revenues would continue to "decline steeply over the coming months" with the surge in unemployment yet to hit the Government's tax figures.
“Thanks to appropriate budgetary policy over recent years, we meet this challenge from a position of strength – a budget surplus, cash reserves and significant progress in lowering our debt,” he said.
Severe economic shock
In its bulletin, the Central Bank says the Covid-19 crisis has triggered a severe economic shock that is fundamentally different to the types of economic crises witnessed in the past.
“For the Irish economy, this has resulted in the widespread shutdown of businesses, mainly in the market services sectors of the economy, with labour-intensive sectors, such as retail trade, food and beverage activities and accommodation, tourism and travel, particularly affected,” it says.
The bank predicts unemployment will rise to a record 25 per cent in the second quarter, up from just 5 per cent in the first quarter, which equates to 450,000-500,000 job losses.
Presuming the economy recovers in the second half of the year, unemployment would fall back to 15 per cent in the third quarter and to 12.6 per cent by the end of the year.
The negative impact of the virus containment measures and the subsequent hit to employment and consumption would see the economy as a whole shrink by 8.3 per cent in gross domestic product (GDP) terms in 2020. This contraction might double to 15 per cent if the lockdown period is extended beyond June, it warns.
The Central Bank says the overall fiscal cost of the virus to the exchequer would be €21.8 billion, comprising €8.2 billion of additional spending on income and business supports, and €13.6 billion in lost tax receipts and additional welfare payments.
As a result, the Government is now likely to run a budget deficit of €19.6 billion in 2020, it said, instead of a surplus of €2.2 billion.
The Central Bank says there is a much higher level of uncertainty surrounding these fiscal projections than would normally be the case as the duration and intensity of the pandemic is unknown at this stage.
Further uncertainty
The potential reduction in consumption and investment demand in the Republic’s main trading partners gives rise to further uncertainty, it says.
"The starting point for the recovery will depend on the depth and duration of the downturn, which is, as yet, unknown, though the hope is that forceful containment measures can shorten the period during which economic activity has come to a stop," Mark Cassidy, the Central Bank's director of economics and statistics, predicts.
“When it emerges, the pace of recovery is likely to depend on factors such as the extent to which households and firms have been scarred by the downturn, the degree to which precautionary behaviour unwinds, the recovery in employment and incomes and, possibly also, the degree of stimulus in place to provide some impetus to recovery.”
Mr Cassidy dismisses a suggestion that the current crisis was equivalent to a “depression-era” downturn, noting that a depression referred to a prolonged period of falling employment and incomes.
Warning of a global recession, Taoiseach Leo Varadkar, however, said Ireland is not facing into an era of 2008-like spending cuts: “The objective, if I have anything to do with it, will be to avoid another era of austerity.”
“I believe we can avoid it this time because the country is in a stronger position. It went into this crisis with a well-balanced economy, with public spending under control, with a debt that was going down and with a budget surplus, and with reserves.”
Favouring “the reverse of austerity”, including “potentially, tax cuts”, Mr Varadkar said no-one will know if Ireland is able to borrow the sums that will be necessary “until we count the costs” left by the Covid-19 crisis.
