The State cannot continue to run a strongly expansionary budgetary policy as it has during the pandemic while economic growth accelerates, Minister for Finance Paschal Donohoe has warned.
He told the national economic dialogue on Monday that to do so would “imply a shift from the pursuit of counter-cyclical policy during the [Covid-19] crisis to a massively pro-cyclical stance during the recovery”.
He said this “would undermine the sustainability of our public finances”.
Minister for Public Expenditure Michael McGrath said “the bottom line is we must manage our finances sensibly as we emerge from Covid to avoid major problems down the line”.
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Speaking also at the national economic dialogue on Monday, he said: “Failure to unwind Covid spending once Covid is behind us means this has to be funded by higher taxes or by running larger deficits for longer, with the associated risks this brings for our finances once the European Central Bank’s intervention in the markets tapers off and the fiscal rules are fully reinstated.”
The two-day national economic dialogue is essentially a forum for Ministers, employer representatives, trade unions, social campaigners and other groups to discuss competing economic and social priorities ahead of preparations for the budget in October.
Mr Donohoe said while the pandemic had not yet been defeated, it was already clear that the macroeconomic context against which the forthcoming budget in October would be framed was one in which economic recovery was gaining significant momentum.
“Against this backdrop, it is important that fiscal policy evolves to reflect changing circumstances.”
He said it was “worth stressing that, by the end of this year, Irish public sector debt will stand at close to a quarter of a trillion euro”.
Economic upturn
Mr Donohoe said he believed the upturn in the economy was in an early phase but warned the recovery would be diverse in its impact.
“Some sectors are already regaining pre-pandemic levels of activity, while others will need to change and adapt to reflect a post-pandemic environment. Government policy needs to reflect this reality.”
Mr Donohoe said the decline in activity after public health restrictions were reimposed in the first quarter of this year was not as severe as that seen during the first lockdown in spring of 2020.
“Modified domestic demand, which provides the best measure of domestic economic activity, fell by 5 per cent on an annual basis in the first quarter of 2021, as compared with a fall of 15½ per cent in the second quarter last year.”
“This is clear evidence that in the face of some of the most stringent restrictions across advanced economies, firms and consumers have adapted their behaviour.”
The Minister said there was evidence of price pressures, domestically and internationally, and these would need to be carefully monitored.
“However, at the moment, my department’s central expectation is that these pressures are transitory.”
Separately Mr McGrath, in a report on the operation of financial emergency legislation released on Monday night, said general government gross debt was projected to be just over €239 billion for 2021.
Mr McGrath said the level of debt accumulated over a short period of time would not have been possible without unprecedented monetary support from the European Central Bank. However, he warned that a faster-than-assumed economic recovery in the euro zone or a spike in inflation could trigger a return to a normalisation of monetary policy quicker than anticipated.
Mr McGrath said he had concluded following a review that remaining measures set out in financial emergency legislation continued to be necessary.
