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Finance Minister Paschal Donohoe.
Finance Minister Paschal Donohoe.
Image: Sam Boal via RollingNews.ie

Budget 2021: Government's spending plans based on assumption of no widely available Covid-19 vaccine and no UK-EU trade deal

Finance Minister Paschal Donohoe has published the 2021 economic forecast.
Sep 29th 2020, 3:40 PM 27,140 24

Updated Sep 29th 2020, 5:00 PM

FINANCE MINISTER PASCHAL Donohoe has said the government is preparing next year’s Budget on the basis that there will be no UK-EU trade deal and no widely available vaccine programme. 

Donohoe provided details on preparations for the 13 October Budget this afternoon, outlining that some estimates for the Irish economy are better than previously forecast. 

Economists at the Department of Finance are estimating that the country’s GDP is to fall by 2.5% this year and grow by only 1.4% next year. 

This is a large deviation from what was previously expected, with economists earlier this year predicting GDP could drop by 10%.

This new forecast, which was signed off by the Irish Fiscal Advisory Council, was made by using two critical assumptions; that no UK-EU trade deal would be agreed and that a widespread vaccine for Covid-19 will not be available. 

Asked about that latter consideration, Donohoe said that even if a vaccine is available in the beginning of 2021, there is no clarity on when a broadly available vaccine programme would be in place. 

The Finance Minister said domestic demand has been particularly hard hit by the Covid-19 pandemic, with the department estimating that it would fall by 6.5% by year’s end. 

Donohoe said the budgetary assumptions take account of Covid-19 restrictions levels changing across Irish counties over the next six months, but the minister did not specify what they could be. 

Speaking about the room for spending in the 13 October budget, Donohoe said that €900 million would be available to Minister for Public Expenditure Michael McGrath to disperse to different departments. 

“There will be initiatives that were highlighted in the Programme for Government that will be initiated on Budget Day,” Donohoe said. 

What Michael is now doing is working with every minister in government to see how that can be managed with all the expenditure pressures that are there. And then I’m working with Michael to see how that can fit inside the kind of borrowing required for next year that I believe is safe for our country. So there will be progress on priorities that are highlighted in the Programme for Government, but sitting alongside that would have to be progress on how we can make sure we get the right level of economic support in place for next year, as our economy customers continue to deal with the consequences of Covid-19.

Unemployment

On employment, the Department of Finance estimates that employment will fall by 13.8% this year, meaning we will have an average unemployment rate of 16% as 2020 ends.

It is estimated that this will drop to 10.7% next year with the addition of 145,000 jobs.

Despite the grim forecasts, Donohoe said that the decline expected has not materialised and is “less severe” than experts had originally thought.

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He also stressed that this forecast is looking at our GDP and not our internal economy.

“The forecasts that we have now are in line with our best estimates as to what we think will happen. It is the case that if we look at how the economy has performed in 2020, while there are still so many that are without a job that would have expected to be in a job, it is the case in spite of that that the economy has performed better this year that we would have thought likely,” he said. 

The estimates are based on a significant upward revision from earlier forecasts published in the spring, but this is largely due to the strong performance of parts of the exporting sectors, most notably in the pharmaceuticals sector where exports have surged this year, a the Department of Finance read. 

Donohoe explained: “My department is projecting that GDP will fall by 2.5% this year. While this headline figure is less severe than envisaged in the spring, it reflects the contribution to GDP from parts of the multinational sector.

“While the economic decline is expected to be less severe in 2020 than previously envisaged there is no doubt that we have experienced a significant shock since March and the onset of Covid 19. On the plus side, however, it is important to note that employment is expected to grow by around 7% or 145,000 jobs next year, having a very real impact on the economy and society more generally. 

“The pandemic, however, will result, in all likelihood, in some level of permanent damage to the economy – so-called ‘scarring effects.  However, policy can help to minimise these.” 

- With reporting by Garreth MacNamee 

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Garreth MacNamee

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