Ireland’s increase in public spending in 2020 second highest in euro area

The increase in public spending in Ireland last year was the second largest in the euro area and "has mitigated" much of the negative economic impact of the Covid-19 crisis, according to a report by the Central Bank.

In an economic letter – entitled Covid-19 and the Public Finances in Ireland - the Central Bank put the cost of all measures deployed to fight the pandemic in 2020 at €24.6 billion.

This included €16.4 billion in additional expenditure measures, €10 billion of which went on income supports; €3.2 billion in Revenue measures, such as tax deferrals; and €5 billion in indirect measures such as credit guarantees and loans.

The Government’s Covid package caused public spending to rise by 20.5 per cent in 2020, the second highest of any euro-area state, it said. As a percentage of the economy, the Covid spend was 12.2 per cent, which roughly mirrored the euro-area average.

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The letter, authored by several of the Central Bank's leading economists, said the European Central Bank (ECB) had also played a critical role in "easing financing conditions and boosting the level of output" during the crisis.

Asset purchases

It estimated that the ECB's mammoth asset-buying programme reduced the cost of borrowing for the Irish Government by 80 basis points on benchmark 10-year bonds – which implies a direct interest saving of about €192 million per year.

On the removal of Covid supports, it said they would need to be maintained over the short term in order to stabilise the economy.

“When health risks diminish, any continued support via current expenditure should be targeted and temporary,” the report said.

It also warned that increases in current spending outside Covid-19 – Budget 2021 contained a €5.4 billion increase in exchequer expenditure – could be sustainably accommodated only if accompanied by offsetting revenue-raising measures.

“Long-lasting spending increases funded by debt could result in a permanent rise in the Government deficit, increasing the risks to fiscal sustainability and limiting the scope to respond to future crises,” it said.

Three phases

The letter noted that the Government’s response to the pandemic had occurred in “three broad phases” . Phase one was the initial response in March and April, involving additional health spending and the creation of new income-support measures.

Phase two was centred on the July stimulus, “which built on the initial measures but also included job-creation measures with a view to the expected recovery at the time,” the study said.

Phase three was Budget 2021, which the Central Bank said had been “framed at a time of high levels of uncertainty around the pandemic and Brexit”.

The study said the Government’s measures have helped to mitigate the negative impact of the pandemic on Irish households, firms and the broader economy, primarily by offsetting the fall in incomes and reducing the rate of financial distress among firms.

“More broadly, the fiscal measures have boosted overall economic activity with higher government spending reducing the scale of the decline in non-traded sector output,” it said.

The study estimated that the initial fiscal response to the pandemic – measures introduced up to June 2020 –increased output by about 2 per cent last year relative to a baseline without the measures.