Pandemic welfare supports will need to be extended after the economy further reopens next month, and on a "more targeted basis into 2022", the chairman of the Irish Fiscal Advisory Council (Ifac) has said.
Sebastian Barnes told the Oireachtas Committee on Budgetary Oversight the economic impact of Covid-19 would have been twice as bad if the Government had not provided "large temporary supports" to workers and businesses.
Unlike the response to the 2008 financial crisis, the Government was able to pursue countercyclical fiscal policy – in other words increase spending in a downturn, Mr Barnes told the committee.
“This approach may have halved the contraction in the domestic economy in 2020,” he said.
While the Irish economy grew by 3.4 per cent in gross domestic product (GDP) terms last year, modified domestic demand, arguably a more accurate measures of domestic economy, contracted by 5.4 per cent, placing Ireland in the mid-range of European economies.
Tánaiste Leo Varadkar said the Government would next week outline plans to phase out pandemic welfare supports from October onwards, while pledging there would not be a "cliff edge" cutting of those supports.
Mr Barnes said these measures would have to be extended after the economy opens up next month and on a “more targeted basis into 2022”.
Members of Ifac were appearing before the committee in the wake of its most recent assessment of budgetary matters, which was highly critical of the Government. The report claimed the Government's budgetary forecasts "lack credibility" and were inconsistent with future spending commitments.
It said the Government’s financial projections were based on technical assumptions that would not carry the cost of maintaining the current level of public services let alone the policy commitments signed up to in the programme for government.
“While it is welcome that the Government has provided new medium-term forecasts, the medium-term budget projections are poorly founded,” Mr Barnes said.
He noted that the spending projections for later years assume current spending grows by 3.5 per cent every year.
The council’s estimates of “stand-still spending costs” imply current spending being about €1.2 billion higher than that by 2025, Mr Barnes said.
“This includes the estimated cost of maintaining existing policies, while fully allowing for price and demographic pressures,” he said.
Sharper
On the outlook for the economy in general, Ifac was more positive than the Government, suggesting the “bounce back” as Covid restrictions ease and as vaccines are rolled out will be sharper than anticipated.
“The economy has proven more resilient to repeat waves. While the Government’s official forecasts assume permanent losses, or ‘scarring’, of about 5 per cent due to the pandemic, these forecasts are relatively cautious,” Mr Barnes said.
“The council sees more upside potential to growth. The unwinding of savings could boost consumer spending and much of the rebound could be largely domestic in nature, such as in the services sector.”
However, he cautioned that there were still risks. “Virus mutations could lead to further lockdowns, international tax reforms could reduce foreign direct investment, and Brexit‘s impacts could be worse than assumed.”
