New forecasts indicate that the Government should not come under pressure to raise taxes significantly or cut back on spending in the next couple of years as the economy emerges from the pandemic.
Based on current policies, the budget deficit is expected to fall quickly from next year onwards, according to the latest Department of Finance estimates, as the economy rebounds, with the budget reaching a position close to balance by the middle of the decade.
At a briefing on the figures yesterday, Minister for Public Spending, Michael McGrath, said he did not envisage a return to austerity budgets.
However the forecasts are based on existing policies and new spending programmes are likely be considered as part of a wider Government economic plan, now due to be published this summer.
The Irish Fiscal Advisory Council, the budget watchdog, has previously said that the Government needs to outline how it will pay for ongoing spending commitments in the years ahead.
The Stability Programme Update (SPU), the latest economic forecasts from the department submitted to the European Commission, predicts a strong bounce in the economy as it reopens, with GDP growth of 4.5 per cent this year and 5 per cent next year, driven by a rebound in consumer spending.
The document underlines that this is reliant on a successful, if gradual, reopening of the economy as vaccines roll out. There remains considerable uncertainty about this, it said, and if there are ongoing lockdowns, growth will slow and unemployment will remain higher.
As part of the figures, the department has factored in €2 billion in lower annual revenues from corporation tax by 2025 to allow for the impact on Ireland of international changes coming from new US policies and a possible agreement on corporate tax reform at the OECD.
A €500 million cost to annual corporate tax revenue is factored in each year from 2022 to 2025 to account for likely changes. However the Department of Finance still expects a small increase in total corporation tax receipts from €11.6 billion this year to €12.5 billion by 2025, a much smaller rate of increase than seen in recent years.
Presenting the new economic forecasts in the Stability Programme Update, sent every spring to Brussels, Minister for Finance, Paschal Donohoe said that stronger growth could help return the budget to close to balance by 2023 or 2024, on the basis of no policy changes.
These wold form a “foundation” on which the Government would seek to build as it looked at its new economic plan, he said. The general government deficit, the EU borrowing measure, is forecast to fall below 1 per cent of GDP by 2024. Mr McGrath said that the focus for 2022 would be continuing to support the economy out of the pandemic.
The figures include special supports such as the PUP and wage subsidies continuing to June, but the Ministers said discussions were underway on how best to extend business supports. Some €2.5 billion has been pencilled in for 2022 in sectors supports, as well as allowing cash to deal with higher unemployment.
The unemployment rate is expected to average 16.25 per cent this year, including those on the Pandemic Unemployment Payment, and fall to 8.25 per cent next year.
The SPU forecasts a significant bounceback in the economy, led by the reopening and higher spending. It estimates that modified domestic demand – a measure of the domestic economy – will rise by 2.5 per cent this year and a more substantial 7.5 per cent next year.
A downside scenario in the SPU, which assumes that current restrictions need to remain in place for a prolonged period, involves GDP growth of 1.5 per cent this year and 2.5 per cent in 2022, significantly lower than the central estimate.
Based on the central assumption of the economy reopening, the department predicts that the exchequer deficit – on the EU measure – will fall to 4.7 per cent of GDP this year, from 5 per cent last year.The resumption of stronger growth is expected to lead it to fall to 2.8 per cent next year.