Ireland’s “significant” increase in public spending since the onset of Covid-19 mitigated against the “worst effects” of the pandemic on the economy, a new report has found.
The country’s spending was the second largest in the euro area in the first three quarters of last year, but protected households, firms and the broader economy from the negative impact of the virus, the Central Bank document showed.
Researchers of the bank’s latest economic letter, Covid-19 and the Public Finances in Ireland, which was published on Monday, examined the impact of coronavirus on the public finances and the role of the policy responses from the Irish Government and the ECB during the pandemic.
Today we have published a new Economic Letter “COVID-19 and the Public Finances in Ireland.” The research examines the impact of COVID-19 on the public finances and the role of the policy responses from the Irish government and the ECB during the pandemic. https://t.co/wYQLy9GQCe pic.twitter.com/SpYx8IuNQ6
— Central Bank of Ireland (@centralbank_ie) March 22, 2021
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“The fiscal response to Covid-19 in Ireland has been significant, with the increase in public spending the second largest in the euro area in the first three quarters of 2020,” the report says.
“The necessary fiscal actions have supported the health system and protected the economy from the worst effects of the pandemic.
“ECB policy has also played an important role in the crisis response – easing financing conditions and boosting growth in the euro area and in Ireland.”
The document analysed the effects of ECB monetary policy on output in the euro area and Ireland, noting that ECB policy support has been designed to preserve favourable financing conditions and to bring medium-term inflation back towards its aim of below, but close to, two per cent.
The ECB measures ensured borrowing costs remained at exceptionally low rates last year, maintained access to credit for the private sector and facilitated the fiscal response in Ireland.
The report authors estimate that ECB monetary policy actions will boost the level of output in the euro area and in Ireland by around 1.4 per cent in 2021, relative to a scenario in which the ECB had not intervened.
They warned that policy support will need to be maintained over the short-term to stabilise the economy.
“When health risks diminish, any ongoing support via current expenditure should be targeted and temporary,” the report says.
It notes that outside of Covid-19, Budget 2021 contained a €5.4 billion increase in Exchequer expenditure.
The analysis shows that permanent increases in current spending could only be sustainably accommodated if accompanied by offsetting revenue-raising measures.
Long-lasting spending increases funded by debt could result in a permanent rise in the Government deficit, increasing the risks to fiscal sustainability and limiting the scope to respond to future crises.
