I thank the Chair and the committee for the invitation to speak here today.
The institute has undertaken much work on the Covid crisis since March, including our inputs into the work of NPHET, analyses of topics such as childcare and working from home, and the work on which we will focus today, namely, the fiscal impact, with particular reference to social protection expenditure.
I refer first to macroeconomic impacts. In the recent Quarterly Economic Commentary, authored by our colleagues Mr. Kieran McQuinn, Mr. Conor O'Toole, Mr. Matthew Allen-Coghlan and Mr. Cathal Coffey, three scenarios for the economy in 2020 were presented. In the baseline scenario, the lockdown restrictions are gradually lifted until August, in line with the original Government guidelines. After this point, the economy enters a recovery phase that lasts until the end of the year. Under this scenario, real GDP is forecast to decline by more than 12% this year. Private consumption expenditure is expected to fall by 13% this year. The fall in investment is even more significant, declining by approximately 28%. International trade will also decline significantly, with imports falling by 12% and exports falling by 8%. In the severe scenario, the economic shock is even more stark, with a second wave of the virus resulting in the country going back into lockdown in quarter 4. In this case, real GDP is forecast to decline by more than 17% in 2020. The final scenario is the benign scenario. This is the most optimistic scenario, based on a situation in which the pandemic is suppressed so effectively over the latter half of the year that the economy returns to normal "pre-Covid" conditions in quarter 4. Under this scenario, the economy is forecast to decline by about 9% this year.
The impact of the crisis on the labour market can already be seen clearly. Including those on the pandemic unemployment payment, PUP, the unemployment rate reached over 28% in April. Work by ESRI colleagues Beirne et al. and Dr. Barra Roantree has shown that the pandemic has had an asymmetric impact across the labour market, with some sectors and demographic groups impacted more significantly than others. In our baseline scenario, the unemployment rate is expected to average 17% for the year as a whole.
No matter which scenario we find ourselves in, there will be significant repercussions for the public finances in 2020. In our winter 2019 commentary, we had forecast a modest deficit of 0.3% of GDP this year. This has been revised down to a 9% deficit under our baseline scenario. In nominal terms, this is a deficit of approximately €28 billion.
Let me mention the PUP. Drawing again on the analysis of colleagues Beirne et al., we estimate the Exchequer impact of job losses in three scenarios. The medium job-loss scenario, involving 600,000 job losses, with the PUP in place is estimated to cost the Exchequer €4.9 billion per quarter, around €800 million more than in a situation in which the existing system of welfare supports remain unchanged.
We find that the introduction of the PUP did much to cushion incomes from Covid-19-related job losses. Figure 1 of my written submission, which I hope Deputies have in front of them, plots the number of families we estimate are affected by a job loss in our medium unemployment scenario, grouped by the size of the change in their disposable income. The number of families who lose more than 20% of their disposable income is reduced by around a third with the introduction of the PUP, and the number who lose more than 60% is reduced by almost one half.
That the PUP leaves some families with more disposable income out of work than they had in work raises the question of how the payment affects financial incentives to work. Although these may be of little importance while public health measures are in place, our simulations suggest careful consideration should be given to how these supports will be scaled back.
In addition to the PUP, the Government also introduced the temporary wage subsidy. Beirne et al. examined the impact of the initial version of this scheme on the Exchequer and households. This version of the scheme was less generous to lower paid employees than the revised scheme and excluded some higher earning workers from eligibility.
The Exchequer cost of the temporary wage subsidy scheme, TWSS, was found to be potentially lower than the cost of the PUP as many workers are entitled to less than €350 per week under the scheme, and many receive a top-up payment from their employer. This conclusion will remain true for the revised scheme. We estimate that if half of those who lose their job in our "medium" unemployment scenario were to instead remain in work and receive the temporary wage subsidy alongside the maximum employer top-up allowed, the net impact on the Exchequer would be €360 million less per quarter than the PUP. This equates to approximately €120 million per quarter less for every 100,000 who transfer from the PUP to the TWSS, with a full-top up paid by the employer.
There is more on the TWSS in my written submission but I plan to proceed to my concluding remarks. We can pick up on some of the issues concerning dead weight and others in the questions.
The ESRI, in its macroeconomic forecasting work, has not yet attempted to provide forecasts for 2021. We judged that there was simply too much uncertainty for such an exercise to be undertaken. However, like other forecasting agencies, we expect a fiscal deficit to remain in 2021 even in the context of a likely recovery. From a policy perspective, ongoing borrowing to fund such a deficit will be the correct option. The key consideration here is that borrowing is appropriate in the context of a temporary deficit which is likely to be closed as the economy grows. It will also be advisable to borrow for investment under a stimulus package. With interest rates close to zero, such a course would help to reboot the economy while also tackling some of the infrastructural needs which are well understood.
Much has been written about a possible expanded role for the State in a post-Covid society, covering issues such as health, childcare and basic incomes. While borrowing is the appropriate response where a deficit is cyclical, an enhanced role for the State will have to mean higher taxes. Though the precise source and structure of those taxes is an open question, an increase in the total tax take is likely to be needed.