On April 21st, Minister for Finance Paschal Donohoe published the Government's Stability Programme Update (SPU), effectively its fiscal and economic outlook for the year.
Its base assumption was for a 10.5 per cent contraction in the economy and for a budget deficit of 7.5 per cent of gross domestic product (GDP)or €23 billion. Grim but tolerable in the circumstances.
The document, however, included two potentially bleaker scenarios if coronavirus containment proved more problematic and economic restrictions had to be extended into the third or fourth quarter.
Instead of a projected 10.5 per cent contraction, the economy could shrink by as much as 13.7 or 15.2 per cent, entailing budget deficits of €27 billion or €29 billion under these two worst-case scenarios. It’s good expectation management to set out potentially more threatening situations that hopefully we won’t encounter.
The problem is that barely three weeks on we're already exceeding the most severe scenario in terms of our budget deficit projection. Taoiseach Leo Varadkar and Paschal Donohoe have both admitted in recent days that the deficit is likely to exceed €30 billion. Two things have forced this revision.
Spending on the Governments’s pandemic assistance schemes – the Covid-19 Pandemic Unemployment Payment and the wage subsidy scheme – will be bigger than expected as both schemes are to be extended, albeit with changes, beyond the original 12-week period. This was sort of implicit at the time of the SPU but nonetheless not included in the formal projections.
Also, because the restrictions will be in place until the third quarter – the Government’s five-phase plan for lifting them runs until August 10th – that has an impact on the economy and therefore on welfare spending and taxes and therefore on the public finances.
The question now is will the other parameters in the Government’s base assumption, namely the 10.5 per cent economic contraction and the 13.9 per cent unemployment rate for 2020, also evaporate?
At the height of the financial crisis in 2009, the State was spending €23 billion more than it was taking in by way of taxes and other income. That amounted to 14 per cent of GDP back then. The consolation this time around is that we can borrow on the markets at very low rates. For now, at least.