In space of three months, the Government’s budgetary policy has radically altered. The drive to achieve a balanced budget by 2025 – set out clearly in April – has been jettisoned.
Instead, the Summer Economic Statement (SES) sets us on an entirely different fiscal path, envisaging a series of much bigger budget deficits, finishing with a deficit of €7.4 billion in 2025.
By contrast, the Stability Programme in April put forward by Minister for Finance Paschal Donohoe had pencilled in a deficit of just €800 million for 2025: for all intents and purposes a balanced budget.
The new estimates anticipate an additional €18.8 billion in borrowing over the next five years, due largely to borrowing that will be necessary to fund housing construction.
The change is undeniably linked to the housing crisis and the political fallout awaiting Coalition parties if the status quo continues, as illustrated by Fianna Fáil’s result in last week’s Dublin Bay South byelection.
It also comes on the back of a report by the Economic and Social Research Institute (ESRI), calling for a doubling of the Government’s capital investment on housing, which the think-tank said could be financed by running bigger annual deficits.
Division within Government on economic policy delayed the publication of the SES. Senior Cabinet figures are said to have clashed over the spending plans in the Government's soon-to-be-published Housing for All strategy.
In the normal course of events, the SES is a follow-on from the Stability Programme Update (SPU), which was submitted to the European Commission in April.
But a quick compare and contrast of the two documents shows something has shifted in the body politic.
Forget about the massive upgrade in the Government’s headline growth projection for this year – from 4.5 per cent to 8.75 per cent – that was expected on the back of a rebound in consumer spending and stronger-than-expected exports.
The area to focus on is Government spending and deficit projections out to 2025. Someone has taken a red pen to the SPU estimates.
The €18 billion deficit anticipated for this year has increased to €20.3 billion while the near-balanced budget earmarked for 2025 has been replaced by a projected deficit of €7.4 billion.
"This is around €6.5 billion more than envisaged in the SPU and reflects the Government's commitment to resourcing capital investment and to meet the goals of our National Development Plan [NDP] review," the SES said, noting cumulatively the Government will borrow €18.8 billion more than originally set out.
The SES was followed quickly by a statement from the National Treasury Management Agency (NTMA), the State's debt management agency, alerting markets and creditors that it was altering its 2021 funding range to take account of the Government's new budgetary position.
Make no mistake, the budgetary sands have shifted.
