Austerity package of as much as €14bn may be needed to control Covid-19 debt, warns fiscal watchdog Ifac
Spending of billions to support the recovery over the next few years is the right thing to do, but a new government soon after will face “difficult choices” over cuts and tax rises if it is to meet pledges over Sláintecare and housing, the head of the Irish Fiscal Advisory Advisory Council has warned.
In its first major report since the onset of the Covid-19 crisis, acting chair of the fiscal watchdog, Sebastian Barnes has sent out a message to the Fianna Fáil and Fine Gael negotiators that they face tough choices if they succeed in putting together a new government.
They shouldn’t narrow their options by ruling out tax increases or freezing public sector pay if the country’s ability to fight a further crisis in the future is not undermined, as debt levels reach “near record levels” of between 114% and 160% of output in 2021.
“Adjustments” to spending plans or fiscal measures amounting to €6bn, or €2bn a year over three years, will likely be needed -- and as much as €14bn in cuts, or €4.7bn a year under the worst scenario -- when the economy emerges from the crisis and recovery phases.
However, the adjustments won’t need to be as “dramatic” as that of the last crisis, Mr Barnes told reporters. Meantime, the Government will be right to spend on “a sizeable” recovery package, possibly of €10bn.
On the €2bn-a-year austerity, Mr Barnes said it would “hopefully” be done in ways that were the least harmful.
Ifac said that, by way of illustration, reaching an adjustment of €2bn a year could involve freezing public sector pay for an annual saving of €1.5bn, while a 1% cut in “non-welfare spending” would be worth €500m.
Not increasing public investment as planned would reduce spending by €2bn; doubling the carbon tax could raise about €500m a year; while not indexing income tax bands would be worth €500m, it said. Increasing income tax bands by one percentage point would raise €1bn; and an increase tax rates would raise about €1bn, Ifac said.
“I am not saying that any of those things are the right solution but it does give a sense that these changes are much less dramatic than the kind of changes that were needed in 2008 to 2010,” Mr Barnes said.
Unemployment doesn’t return to its pre-crisis level of below 5% until early 2023. Economic output will be lower than it might otherwise be for over two years; and in 2025, the annual budget is still at an elevated level of around 3% of GNI*, the measure that gives a proper understanding of the Irsh economy.
On the €350 pandemic payment, Mr Barnes said it was important to provide support for as long as it was needed but, he said, there was no reason that the types of support shouldn’t change.
Ifac endorses the need to increase spending to fight the economic fallout and sees the annual interest bill little changed in the coming years because the State can tap sovereign debt markets at close to zero interest rates.
On house prices, Mr Barnes said although construction has been hit there “may be a silver lining” in dampening pressures on housing.
