Forecasts for economic growth sharply upgraded

Official forecasts for economic growth this year have been sharply upgraded, improving the outlook for the public finances heading into the budget.

The Department of Finance now expects GDP to bounce by 15.6 per cent this year, but says a more realistic measure is an expected 5.25 per cent rise in the domestic economy – double the earlier growth forecast made in the summer. The department now sees the economic recovery taking hold more rapidly and has cut its unemployment rate forecast to 7.2 per cent for next year, from 8.2 per cent previously.

The two Ministers who will present the budget, Paschal Donohoe and Michael McGrath, insisted on Wednesday at a press conference to present the revised forecasts that no extra funds would be allocated for the budget day package, despite the improved outlook and its favourable impact on the public finances. They are likely to be able to allocate money to a contingency fund for 2022 while staying within spending and deficit limits.

The Minister for Public Spending, Michael McGrath, earlier told an Oireachtas committee that the issue of a pandemic bonus was being discussed between the Government, unions and employers and was unlikely to be dealt with in the budget. Some or all of the cost of this may be taken in this year’s budget figures, with the Ministers indicating that borrowing for 2021 would be lower than then €20 billion forecast.

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However the two Ministers insisted that there would be no change in spending or tax plans on budget day on foot of the new forecasts. At the moment €1 billion is allocated for new budget day spending measures – a further €3.7 billion has already been allocated – and €500 million has been set aside for tax measures. This year, contingency funding allocated in the budget has been spent and the Ministers indicated that they would want to set aside some contingency for next year. Measures to help people worst affected by rising fuel costs were identified by Mr McGrath as one of the budget priorities.

Artificially inflated

The GDP growth forecast for 2021 has been pushed up to 15.6 per cent, from 8.8 per cent previously. However the department says a variety of factors mean that this figure is artificially inflated. These include the impact of contract manufacturing arranged in Ireland but undertaken overseas, notably in China, and very strong exports from the pharma and IT services sectors.

The vaccine “wall” which has been erected has improved the economic outlook since official forecasts during the summer, according to John McCarthy, chief economist at the department, speaking at the press conference.

A bounce back in consumer spending is pushing growth higher and this will be boosted further when the bulk of remaining restrictions are removed on October 22nd.

Together with extended government supports, this has led the department to up its forecasts for growth in the domestic economy – using the modified domestic demand measure – to 5 .25 this year, with growth of 6.5 per cent pencilled in for next year .

Referring to the latest rise in the rate of inflation, Mr McCarthy said there were signs it would be temporary, particularly as it was being driven by a small number of factors, including higher prices for energy and cars .

The unemployment rate is expected to average 16.8 per cent this year and 7 per cent next year, down on earlier forecasts .