I thank the Chairperson. I am pleased to have the opportunity to be here today to discuss the draft stability programme update, SPU. The SPU sets out the Government’s macroeconomic and fiscal forecasts for Ireland for the next five years. It will be submitted to the European Commission later this month. At the outset, I stress that this is a purely technical document, with the projections based on existing Government forecasts and decisions. In accordance with the requirements under EU legislation, the macroeconomic forecasts set out in the SPU have been endorsed by the Irish Fiscal Advisory Council.
The speed and scale of response to the supply and demand shocks created by the pandemic have been the theme of the Government’s economic response. Since March last year, we have moved rapidly, using the strength of our public sector balance sheet, to replace lost private sector demand in order to ensure that firms, workers and incomes were supported and protected through wage subsidies, deferrals of tax liabilities, and income supports. Our overarching objective has been to support households and firms, as well as to limit the permanent effects of the pandemic.
As we look towards a cautious reopening of the economy over the weeks and months ahead, it is clear from the stability programme update that the relationship between economic activity and public health restrictions has weakened over each wave of the pandemic. Certain sectors of our economy have been better able to adapt to living with Covid. The adaptability and innovation shown by businesses is borne out by the high frequency, real-time economic information published by my Department, which shows that the impact of the current set of restrictions is around half that of last spring. Much of this is due to the flexibility of our domestic enterprises. Firms and consumers have innovated and adapted. Last month’s VAT data, up 8.5 % on the first quarter last year, shows that people have altered their behaviour. They are buying local and buying online.
As we all know, however, the pandemic has not impacted everyone equally. Those in contact-intensive employment have suffered the most, while many others, especially those with the ability to work from home, have had very little or indeed no reduction in income and are as well off as before. Equally, those who have continued to work have continued to pay income tax and many businesses that have been able to operate through the public health restrictions continue to pay corporation tax.
The strength of these revenues, as well as the extraordinary easing of monetary policy by the ECB, have enabled the Government to support jobs, incomes and businesses throughout the crisis. This is only right, as the huge impact of the pandemic has demanded a forceful response from the Government. This is what we have done.
The overall budgetary strategy remains one of providing strong, counter-cyclical budgetary support to the economy. With a value of almost €38 billion, or nearly one fifth of national income, the budgetary support provided by Government has been extraordinary. We are in a position to do this because of the supports of the ECB and the support for our public finances over recent years. The total value of payments paid to date under the Government’s three main support schemes, the pandemic unemployment payment, the employment wage subsidy scheme and the Covid restrictions support scheme, is now €13.5 billion. We have spent more than €7 billion on pandemic unemployment payments and around €5.5 billion on wage subsidies. While the response has been appropriate and necessary, the cost continues to be significant. Last year, a general government deficit of €18.5 billion, or 5% of GDP, was recorded.
In the medium term, the speed at which the economy can recover will depend on our vaccination efforts.
This was a constant theme, for example, in the recent IMF and World Bank meetings. They are the cornerstone of our domestic recovery. The programme is now being accelerated over the coming months. Of course, there will be week-to-week fluctuations and day-to-day challenges but the bigger picture is clear; we are on track to vaccinate a large majority of the adult population of our country by the end of this quarter. This in turn will allow for a more significant easing of containment measures over the summer, and with that a sustainable recovery can begin.
A conditioning assumption underpinning the projections in the SPU is that low levels of public health restrictions will be in place in the second half of the year, with minimal restrictions next year, which should allow economic activity to normalise. However, it is likely that this normalisation will be somewhat different from the pre-pandemic norm.
Based on this scenario, modified domestic demand, MDD, which is the best indicator of economic trends, is projected to increase by 2.5% this year. This will accelerate to 7.5% next year. The release of pent-up consumer and business demand will be the key driver of the economy in the near term. The recovery in consumer spending is also assumed to be supported by an unwinding of part of the excess household savings built up during the pandemic.
The cost of this pandemic is, of course, felt most particularly by those who have lost their jobs. When the number of people in receipt of the pandemic unemployment payment is added to the standard unemployment rate, the unemployment rate is projected to average around 16.25% this year, before declining to 8.25% next year. This level of employment is projected to increase by around 80,000 this year and 225,000 next year, although the level of employment will still remain below its pre-crisis peak until 2023.
Over the medium term, an important but still open question relates to the extent of any permanent destruction of the economy’s productive capacity from the pandemic, the so-called scarring effects. At this base point, evidence is extremely limited. The scale of such harm will become clear over time as more data becomes available. Of course, a key area of focus of our existing policies is to try to minimise that scarring. A preliminary estimate is that my Department is projecting domestic demand to grow at around 3.5% over the medium term. This means that, notwithstanding a reversion to trend growth over the medium term, domestic activity would still be lower by the end of the projection period than the level suggested by the pre-pandemic trend, with employment still lagging. I reiterate that the outlook remains very uncertain - for example, if more stringent health measures are needed for a longer period, the Irish economy could be 4.5% smaller by the end of next year than it would under the main scenario.
On the fiscal front and on a technical basis, a deficit of €18 billion is estimated for the year. This is based on existing Government policies. I repeat, as I said previously, there will be no cliff-edge to our most important supports but any extension to these supports will, of course, worsen our deficit. This year’s deficit will bring our overall debt levels to just under €240 billion, or 112% of national income, measured in a way that strips out some of the bigger influences of larger companies on our national income. To put this another way, our public debt is approaching €250 billion. Once the worst of the pandemic has passed, it will be necessary to address this by eliminating our deficit over time in a way that balances supporting the economy with continued sustainable national finances.
A deficit of just under 3% is projected for next year. This assumes that beyond 2022 all Covid-specific supports are assumed to be unwound. With a recovering economy, withdrawal of these supports should be sufficient to better align what we take in and what we spend. In other words, economic growth via increased tax revenues will be enough to close the gap between what that State earns and what it spends. There are, however, clear downside risks for our public finances. In particular, international corporate tax reform could weigh more heavily on this revenue stream than is currently assumed. Having said that, our public finances are in a better position to absorb the expected shock to revenue than, for example, a decade and a half ago. Our tax base is much wider than prior to the global financial crisis and, importantly, there is time to build up the resilience of the public finances before international reforms move to the implementation phase.
Overall, the pandemic has taken a severe toll on our health, our economic health and lives and livelihoods. However, the continuing progress of the vaccination programme and the collective effort of our country provides reason for optimism. We entered into this crisis from a position of strength and our economic model has proven its resilience. Together, we will overcome the pandemic, rebuild our economy and return our people to work.