‘Where the virus goes, the economy goes’: Donohoe to warn of stop-start cycle

Ireland will experience a series of economic rebounds followed closely by financial setbacks, the Minister for Finance Paschal Donohoe will warn on Thursday.

Mr Donohoe will tell members of the Oireachtas Committee on Budgetary Oversight that Ireland’s economic trajectory is “highly intertwined with the trajectory of the virus: where the virus goes, the economy goes”.

“It seems inevitable that there will be peaks and troughs in the [Covid-19] infection rate, at least in the near-term. This means that economic rebounds followed by setbacks will be an unfortunate feature of our lives.”

The Minister will warn TDs that the economic backdrop to Budget 2021 is "exceptionally difficult", and that while a key plank of the budget will be a recovery fund, Ireland will need to stay "within the pack" of EU member states in terms of debt levels.

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“As we are all too aware in this country, market sentiment can turn rapidly, so we must not be an outlier.”

It comes as Ministers were warned there will be very little room for manoeuvre in this year’s budget because of Brexit, the pandemic and climate change priorities.

Senior sources say about €1.2 billion will be allocated for Brexit as part of Budget 2021. It had been expected that €9 billion would be needed for Covid-related spending next year but sources have cautioned this may now be higher given rising coronavirus cases and the associated restrictions.

Minister for Public Expenditure Michael McGrath is meeting with each Minister this week, and one Cabinet source said the meat of those discussions centres around relatively small sums given the focus on headline priorities.

Separately, members of the Oireachtas Committee on Budgetary Oversight were privately warned that there will be “difficult budgetary trade-offs” this year.

Briefing

The briefing, prepared by an Oireachtas economist in advance of the appearance of Mr Donohoe at the committee, also warned that pandemic supports “cannot be in place indefinitely and will have to continue to be tapered back”.

TDs on the committee were told on Wednesday that the combined cost of the extension of the pandemic unemployment payment and the new employment wage subsidy scheme contained in the July stimulus was estimated to be €1.3 billion for 2020.

“This is now likely to be greater as these schemes are enhanced in counties where public health restrictions are being increased.”

Managing Covid-19 expenditure, supporting the economy and delivering on policy areas of housing, health and climate action will be a “considerable challenge”, committee members have been told.

“Balancing these with the ongoing National Development Plan and the impact of a potential no-deal Brexit will involve difficult budgetary trade-offs.”

Furthermore, any permanent increases in Covid-related expenditure will “need to be matched by commensurate increases in taxation”.

The Government has so far indicated, however, that there will be no broad-based increases in income taxation or changes to tax bands.

Uncertainty due to the path of the Covid-19 virus and Brexit also mean that the economic outlook for the medium term is “cased in uncertainty”.

Politicians were also warned that sectors which “proved resilient” during Covid-19 could be “the most exposed to the impact of Brexit” including agri-food, financial, insurance and real estate.

The cost of the planned postponement to the increase in the State pension age in 2021 has also been flagged as a significant cost with an estimated figure of €250 million.

Meanwhile, the Oireachtas Parliamentary Budget Office warned last night that second and subsequent waves of Covid-19 will make economic forecasting difficult “as the status of the virus and the response to it cannot be predicted”.