finance

Ireland plunged back into fight against deficit and job losses


Ireland fought hard to control its towering debt load after the financial crisis. But now coronavirus has plunged its finances back into deficit and pushed swaths of people out of work, sparking fierce political debate about what spending to cut and how large any reductions should be.

The economic consequences of the pandemic are set to push Ireland into its worst-ever recession, with gross domestic product forecast to fall 12.4 per cent this year and possibly as much as 17 per cent according to the Economic & Social Research Institute think-tank in Dublin.

It is a sharp turnround for a country that had rebounded from an international bailout and a €29.8bn austerity drive to achieve full employment and a budget surplus before Covid-19 struck.

“The scale of the shock that we have faced is completely unprecedented and without equivalent in modern economic times,” said Conor O’Toole, senior researcher at the ESRI.

The challenge is a central focus for the country’s political leaders, who are attempting to form a coalition government in difficult, slow-moving talks which could lead to a deal by mid-June. At issue in the talks is a deficit-reduction plan to kick in from 2022 or 2023 after a stimulus package, although it remains unclear whether there will be specific dated targets. One person close to the talks said the deficit question was a “key area of sensitivity” in the negotiation.

Economists say the country should aim to turn the corner within two to three years, which will need a big stimulus plan. They also warn that Dublin will have to cut spending or raise taxes once growth is restored, in a bid yet again to tackle the national debt.

Line chart of General government net lending/borrowing as % of GDP showing Coronavirus plunges Ireland back into deficit

“The next government will need to make some important and difficult decisions about its competing spending and tax objectives,” said Sebastian Barnes, acting chairman of the Irish Fiscal Advisory Council, a statutory budget oversight body.

He estimated that a sum “of the order” of €10bn in stimulus could be needed over a two-year period to help restore the economy to growth, but warned that after that, the incoming government will face €2bn-€3bn in “fiscal adjustments” annually for three or four years.

However the council is optimistic that the severe austerity of the post-2008 period can be avoided; it could take two to three-and-a-half years to regain pre-coronavirus levels of economic activity, according to the council — a far sharper recovery than the 11 years it took to recover from the 2008 crash.

This leaves politicians with the difficult decision of how to make the necessary budget adjustments given that the spending cutbacks and tax increases that followed the 2008 crash remain politically controversial.

The election in February was fought over spending plans developed at a time of budget surpluses and forecasts of rapid growth, making it even harder for political parties attempting to seal a coalition agreement to decide on cuts.

Theresa Reidy of University College Cork, a political analyst, said the dominant political issue now was Ireland’s “fiscal black hole”. “The election campaign was built around a best-case scenario in terms of economic growth. In terms of what we’re seeing now, to call it a worst-case scenario doesn’t fully capture the extent of the economic impact,” she said.

Line chart of Ireland unemployment rate (%) showing Back to the bad old days

Leo Varadkar’s Fine Gael trailed into third place in the election behind the centrist Fianna Fáil, which won the most seats in the Dáil assembly, and Sinn Féin Irish nationalists, who won the popular vote.

Fine Gael and Fianna Fáil have been in coalition talks for several weeks with the Green party. Mr Varadkar and Mícheál Martin, Fianna Fáil’s leader, refused talks with Sinn Féin.

With plans under discussion to build more social housing, boost healthcare and invest in environmental retrofitting of houses to counter climate change, Dublin hopes the next government will benefit from EU pandemic recovery efforts.

On Wednesday, Mr Varadkar said he welcomed the “broad thrust” of plans from Ursula von der Leyen, European Commission president, to borrow €750bn to pump money into the economy. “We need to kick-start economic and social recovery and get funds flowing to the sectors and regions that need them most,” he said.

But even as the fiscal council and ESRI called for a big stimulus plan from the next government, the prime minister said one of its first decisions will be to taper special coronavirus welfare payments that were introduced in March as almost 600,000 people lost work during the lockdown.

Bar chart of Fiscal adjustment needed*, by economic scenario (€bn) showing Ireland faces fresh spending cuts to make debt more sustainable

“We face a summer of discontent as the economic issues crystallise,” said Ms Reidy.

“Right now the nation is in a kind of crisis mode — and crisis mode is very different to normal politics. As the pandemic supports are unwound, the realities of the economic impact are going to become much more evident for individual voters.”

Kieran McQuinn, ESRI research professor, said the focus for the next couple of years should be on stabilising the economy, maintaining income support mechanisms and reigniting economic activity.

“Certainly I think the incoming government needs to be aware that at some stage there will be a need for some fiscal adjustment down the road,” he said. But adjustments too soon could compound the coronavirus shock, meaning “ironically” that larger adjustments would be needed over the longer term.

“That’s the key balancing act that has got to be achieved. It’s not easy, for sure,” he said.



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