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'Order being restored' to public finances at a faster pace than expected, economists say

“Significant investments” in housing, climate change and healthcare will be required, the ESRI said.

IRELAND’S BETTER-THAN-EXPECTED economic performance should ease the burden of the pandemic on the public finances but “significant investments” will be required to tackle long-standing issues around housing, climate change and healthcare.

That’s according to the Economic and Social Research Institute (ESRI) in its latest Quarterly Commentary this morning.

The Government is currently forecast to run an overall budget deficit of €15.5 billion this year, according to recent estimates by the Irish Fiscal Advisory Council.

Last month, the State’s budgetary watchdog raised concerns about the sustainability of Ireland’s debt to Gross National Income ratio, which it warned could top 100% at the end of 2021 after significant Government outlays on pandemic-related supports and emergency measures.

But according to the ESRI, “The improvement in economic activity and in the labour market will ease the pressure somewhat on the public finances.” 

As a result, this year’s deficit is likely to be “significantly lower” than previously anticipated at about 3.4% of the general government balance falling to 1% next year.

Speaking to reporters, Professor Kieran McQuinn of the ESRI said “order is being restored to the public finances, arguably in a much quicker fashion than was previously thought”.

Part of the reason for this is there hasn’t been as much expenditure on Covid-related measures this year, relative to what was set out in the Budget last October.

“Expenditure levels are a little bit lower but tax revenues, in particular, are very strong reflecting the very accelerated and robust nature of the recovery this year,” he added.

However, Professor McQuinn said the “crucial thing” is how the public finances are managed over the coming years.

“We’ve outlined and argued for higher levels of investment in areas such as housing, and climate change and then healthcare,” he said.

Clearly, the Government, I think, is committed to increasing investment in those areas. But given the very strong pace of recovery in the economy, it’s important that we avoid the risks around overheating.

In that context, Professor McQuinn said the Government would need to show “significant discipline” on current expenditure — spending on day-to-day public services including public sector wages.

Overall, the ESRI has pencilled in headline Irish growth, as measured by Gross Domestic Product (GDP) of 12.6% this year and 7.1% in 2022 on foot of robust export growth and a consumer spending boom.

“The double-digit growth rate is mainly due to multinational related activities, in particular strong export figures,” the ESRI said this morning.

However, modified domestic demand, “a more accurate measure of underlying economic activity”, the Institute said in a statement, is expected to grow by over 7% in the present year. 

Unemployment has fallen sharply as the economy reopened but is expected to average out at close to 17% of the total labour force for the whole of 2021. However, it’s expected to decline substantially to just 7% next year.

Yesterday, the Central Bank of Ireland also upwardly revised its projections for Irish GDP from 8.4% to 15.3% this year.

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