The Department of Finance is being forced to forecast while looking out through a fog. As prospects for the vaccine programme – vital for economic reopening – ebb and flow, it is impossible to predict the economic outlook with any certainty. But it is still important to try to set down some markers.
As the Department’s chief economist, John McCarthy said at Wednesday’s briefing on the latest forecasts,as well as these supply issues, just how well vaccines will work remains uncertain.
The indicators are good, but the emergence of new variants could still cause a problem.
The Department’s central forecast in the latest Stability Programme Update is for a gradual easing of restrictions through this year, with most restrictions gone by next year.
On this basis they predict a gradual pick-up in the economy moving into next year, with 2022 seen as a strong year for consumer spending and the domestic economy.
Still, some economic support related to Covid -19 are thought likely to be needed up to the end of next year and there is some allowance for these in the figures, including €2.5 billion in 2022 to meet pressure which may arise in certain setors.
Unemployment
The jobs market will turn around, but by next year the unemployment rate is expected to still average over 8 per cent.
The Department is starting to calculate the long-term impact of the pandemic on the economy – the so-called “scarring” effect which will linger.
Joblessness and a reduction of activity and productivity in the sectors worst affected is at the centre of this – and the longer lockdown lasts, the more time it will take to return to pre-pandemic unemployment levels.
There are key messages here for the public finances, in the first forecasts since the economy has hit. But they are subtle ones.
The Department outlines the impact of faster growth on the deficit over the next few years, which sees the deficit moves from around 5 per cent of GDP now to close to balance by around 2024.
This is encouraging, as it suggests we can avoid a return to “austerity”, the kind of tax hikes and spending cuts which happened after the financial crash. Strong growth will boost tax revenues and spending pressures will initially ease as emergency supports are phased out.
Plans
However there are two things to note here. First the figures do include some cash for furhter Covid-19 supports into next year, but more could well be needed. Again we are back to the reopening uncertainty.
Second, it factors in a modest 3.5 per cent rise in what is called “core” spending – excluding once-off Covid-19 factors – over the coming years.
The Government will want to do more on spending in range of areas. It must decide how to raise money to fund these new longer-term plans and what targets to set for the deficit.
Minister for Finance Paschal Donohoe has said that the SPU figures are a baseline from which these considerations will start. So the political battles have still to commence.
These things are set to be considered in a wider economic plan, which is due to be published in the summer. By then the outlook may – or may not – be clearer.
