Irish debt will be close to quarter of a trillion by year end, Donohoe warns

Minister says budgetary policy cannot keep expanding while growth accelerating

 Minister for Finance Paschal Donohoe said not   all sectors  would recover at the same rate or to the same extent. Photograph: Collins

Minister for Finance Paschal Donohoe said not all sectors would recover at the same rate or to the same extent. Photograph: Collins


Industry Correspondent

Irish government debt will stand at close to a quarter of a trillion euro by the end of the year, Minister for Finance Paschal Donohoe has said.

Addressing the national economic dialogue - which involves senior Government figures, employers, trade unions and social campaign groups - he said the Government needed to end its expansionary budgetary policy as the economy emerged from the pandemic.

Separately, Taoiseach Micheál Martin told the same event State expenditure over the last year or so on foot of the pandemic - of about €38 billion - was “not sustainable”.

Mr Martin said “we must now move to the next phase, in which the finite resources that Government can deploy are targeted at those who need them most, and used in a way that best supports recovery and our future prosperity”.

“While we will be ambitious in our plans and in what we want to achieve, we must be mature enough as a society to recognise that there are trade-offs, that not everything can be achieved overnight, and that for so many of the challenges we face there are no easy, quick answers or solutions.”

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”.

“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.”

Mr McGrath separately warned on Monday evening that there were more reasons to expect that supportive policies of the European Commission and European Central Bank – which facilitated additional Government spending during the Covid-19 crisis – would change rather than stay the same. In a report on the operation of financial emergency legislation, he said “domestic policy must be conscious of this”.

Mr McGrath also said the actual fall-off in corporation tax receipts to the exchequer in the years ahead could be “far greater” than the €2 billion reduction projected by 2025 on foot of international efforts to reform this area.

The Taoiseach said the Government’s Summer Economic Statement would plot how to achieve a “broadly balanced budget as employment recovers”.

“This will mean making choices around how and what we deliver, choosing what we focus upon, ensuring we are taking a sustainable and responsible approach to our public finances - so that we will again have the space to respond should challenges strike again, as they surely will - and managing within the real constraints we face.”

Mr Donohoe said the macroeconomic context against which the forthcoming budget would be framed was one “in which economic recovery [in Ireland] is gaining significant momentum”.

‘Changing circumstances’

He said it was important fiscal policy evolved to reflect changing circumstances. “Put simply, we cannot continue to run a strongly expansionary budgetary policy while growth accelerates.”

“To do so, would imply a shift from the pursuit of counter-cyclical policy during the crisis to a massively pro-cyclical stance during the recovery, which would undermine the sustainability of our public finances.”

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 re-imposed 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 (MDD), 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 15 ½ 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.”