Q&A: Why has the Government changed its economic policy?

The Department of Finance published its Summer Economic Statement (SES) on Wednesday. The statement sets out the Government's economic and budgetary priorities for the coming year and in particular the budgetary framework within which Budget 2022 can be delivered.

So what’s in the latest SES?

Typically the statement follows the same tack as the Stability Programme Update (SPU), which is submitted to the European Commission in April, albeit with some tinkering to reflect whatever has happened in the interim. However this one marked something of a sea change in Government budgetary policy. The drive to achieve a balanced budget by 2025 – set out clearly in April – has been jettisoned. Instead, the SES sets us on an entirely different fiscal path, envisaging a series of much bigger budget deficits, culminating in a deficit of €7.4 billion in 2025. By contrast, the Stability Programme in April put forward by the Minister for Finance Paschal Donohoe had pencilled in a deficit of just €800 million for 2025: basically a balanced budget. The Government has just lumped €6.5 billion on to this target. It also plans to borrow an additional €18.8 billion.

Why this change in budgetary direction?

The change is undeniably linked to the housing crisis and the political fallout awaiting Coalition parties if the status quo continues, as some say is illustrated by Fianna Fáil’s result in last week’s Dublin Bay South byelection. It also comes on the back of a report by the Economic and Social Research Institute (ESRI), calling for a doubling of the Government’s capital investment on housing, which the think-tank said could be financed by running bigger annual deficits. Division within Government on economic policy delayed the publication of the SES. Senior Cabinet figures are said to have clashed over the spending plans in the Government’s soon-to-be-published Housing for All strategy. In the normal course of events, the SES is a follow-on from the SPU but a quick compare and contrast of the two documents shows something has shifted in the body politic.

What’s in the detail?

The area to focus on is the Government’s deficit projections out to 2025. Someone has taken a red pen to the SPU estimates. The €18 billion deficit anticipated for this year has increased to €20.3 billion while the near-balanced budget earmarked for 2025 has been replaced by a projected deficit of €7.4 billion. “This is around €6.5 billion more than envisaged in the SPU and reflects the Government’s commitment to resourcing capital investment and to meet the goals of our National Development Plan [NDP]review,” the SES said.

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What about borrowing?

The new estimates anticipate an additional €18.8 billion in borrowing over the next five years. This will facilitate new expenditure ceilings, which are now bigger for every year. By 2025, the Government plans to have current and capital spending at €93.2 billion – €5.9 billion more than the €87.4 billion set out in the SPU in April. Part of this is to cover the cost of an ageing population; the digital and carbon transitions; the need to finance the provision of better healthcare, including via Sláintecare. However, it is also there to cover additional spending on housing, now seen as a political priority. The SES was followed quickly by a statement from the National Treasury Management Agency (NTMA), the State's debt management agency, alerting markets and creditors that it was altering its 2021 funding range to take account of the Government's new budgetary position.

Where does that leave the national debt?

Last year the national debt was €218 billion, which equates to 105 per cent of national income. This will now grow to €280 billion by 2025 reflecting the additional spending on Covid-related measures this year and next and the additional spending mentioned above. On a per capita basis, public debt stands at just under €44,000 per person in 2020, one of the highest levels in the world. The Government said in its statement that it will continue to borrow over the medium-term, so that the level of debt will rise further.

What about the economic outlook?

The Government upgraded its headline growth projection for the economy for this year – from 4.5 per cent to 8.75 per cent – on the back of a rebound in consumer spending and stronger-than-expected exports. This is big but not unexpected and in-keeping with other predictions from the Central Bank and the ESRI. “Within domestic sectors the recovery is uneven, and Government is acutely aware that, at this point, many contact-intensive sectors, dependent upon face-to-face contact, have been bypassed,” the Department of Finance said. “These sectors remain the epicentre of the economic fallout from the pandemic but the risks to the wider society of a full reopening of these sectors remains high, especially as the Delta variant becomes the dominant strain,” it said. “The central expectation is that, as vaccination coverage widens in the coming weeks, restrictions can be relaxed further,” it added.