The Irish Times view on Irish economic policy: a plan is essential

Low interest rates have transformed the outlook for the public finances, but there are still limits and a need to plan

The Fiscal Advisory Council warns that the budget for 2021, delivered by Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath, includes at least €5.4 billion in long-term spending commitments not directly related to the pandemic in areas like health and education – a “ surprisingly large” figure. Photograph: Crispin Rodwell

The Fiscal Advisory Council warns that the budget for 2021, delivered by Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath, includes at least €5.4 billion in long-term spending commitments not directly related to the pandemic in areas like health and education – a “ surprisingly large” figure. Photograph: Crispin Rodwell

 

Trying to get to grips with how the Covid-19 pandemic has affected the public finances is difficult, given the massive spending required to protect businesses and their employees. So the Irish Fiscal Advisory Council’s analysis in its annual post-budget report is particularly welcome, helping to separate once-off spending increases from more permanent ones.

It is underlining that longer-term increases in government spending need to be financed and that the Government has not given any indication of how it will do this

The council continues to take a positive view of the emergency measures, saying they will help to support activity and incomes and lessen the long-term economic damage. However it warns that the 2021 budget also includes at least €5.4 billion in long-term spending commitments not directly related to the pandemic in areas like health and education – a “surprisingly large” figure. The lack of a plan to finance these is “not conducive to prudent economic and budget management”.

It is important to understand what the council is – and is not – saying. It is underlining that longer-term increases in government spending need to be financed and that the Government has not given any indication of how it will do this. It is not saying that tax increases or spending cuts are needed in the short term. With pressure on the public finances from an ageing population, the need to pay for green measures and other areas, the IFAC says the Government must take the opportunity to outline a detailed plan for the public finances in its next update to the European Commission in the Spring. This will be politically challenging, but is an essential piece of work.

The council’s estimates on how the public finances might evolve in the next few years in the light of the Covid-19 shock are reasonably reassuring, assuming economic growth does revive and interest rates stay low. Much depends, of course, on trends in the pandemic and the Brexit talks.

The Government has said that it will publish detailed medium-term budget forecasts, probably next April. The IFAC’s report underlines that this will be an important and difficult task. Low interest rates have transformed the outlook for the public finances, but there are still limits and a need to plan.

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