From Department of Finance; Department of Public Expenditure, NDP Delivery and Reform
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The Minister for Finance, Paschal Donohoe TD, today (Wednesday) published the Government’s Stability Programme Update for 2022. This document sets out the Department of Finance macroeconomic and fiscal forecasts for the period 2022-2025. The macroeconomic forecasts underpinning the SPU were endorsed by the Irish Fiscal Advisory Council on 4th April (a legal requirement).
Commenting on the figures, Minister Donohoe said:
“These economic and fiscal projections come at a time when the Irish economy is grappling with its third severe economic shock in as many years – Brexit, a global pandemic and now the fall-out from the war in Ukraine.
“While Ireland’s direct exposure to the Russian economy is relatively small, it is clear that the conflict in Ukraine is already having a negative impact on the Irish economy, mainly via higher energy and commodity prices. On foot of these developments, my Department now expects inflation to peak at 6¾ per cent in the second quarter of this year before easing slightly over the rest of the year.
“Higher inflation will inevitably impact on the purchasing power of households. Uncertainty will also affect consumer spending and investment decisions. As a result, my Department is now projecting Modified Domestic Demand growth this year of 4¼ per cent - a 2¼ percentage point reduction relative to the Budget. Despite this, the headwinds we face today are expected to delay – but not derail – economic growth.
“Given the degree of uncertainty at present, the margin of error around these projections is sizeable. As such, we also set out an alternative severe scenario, where the increase in oil and gas prices is larger than assumed; under this scenario inflation would increase by an additional 2 percentage points to an annual average of 8¼ per cent, peaking at 9¼ per cent in the third quarter of this year. This would in turn have negative implications for the domestic economy and the government finances.
On the public finances, Minister Donohoe said:
“We are projecting a budget deficit of €2 billion for this year. This would result in a cumulative deficit of almost €30 billion since 2020. For next year, after allowing for a contingency fund of €3 billion to help address the humanitarian consequences of the Ukraine conflict, we are expecting a small surplus of €1.2 billion. However, the modest surplus currently in prospect for next year would be eliminated if there was a greater than expected increase in energy prices.
“Serious fiscal challenges lie ahead: an ageing population, an almost-certain fall in corporation tax revenues; climate and digital transitions and, in the near-term, the need to finance humanitarian assistance to refugees fleeing war in Ukraine. Public debt is already very high and the cost of borrowing is now rising. All of this means that choices will have to be made; the public sector balance sheet cannot continually be deployed to address every challenge.”
“We have shown great resilience throughout the pandemic, once again we will need to be resilient in the face of serious external challenges and the rising cost of living. While Government will work to minimise the fall-out on those who are ill-equipped to respond, it must be stressed that resources are limited. Government will share, but cannot assume, all the burden of higher energy prices.”
Commenting on the publication, Minister McGrath said:
“Since the onset of the pandemic, Government has made available €37 billion to provide for direct expenditure measures to support our key public services in responding to the challenges of Covid-19 and to provide the necessary income and employment supports to our people and businesses. As we emerge from the pandemic, our economy and labour market are recovering with unemployment rate forecast to fall close to 5½ per cent by the end of the year.”
“However, as the economy improves and we return our public finances to a sustainable path, we now face new challenges. Supply issues which developed over the past two years during the pandemic have contributed to price increases. This has been added to by the impact of the conflict in Ukraine and the resultant commodity price increases. The SPU reflects these developments with a revision of HICP inflation rate up to 6¼ per cent for 2022.”
“Government is acutely aware of the impact of these price pressures on households. Recognising this, the Government has now introduced €1 billion worth of measures over the past 2 months. ”
“Responding to the humanitarian crisis as a result of the war in Ukraine is a challenge that is being addressed to provide the necessary accommodation, health, education and welfare supports for refugees fleeing the war in Ukraine. We are at the early stages of dealing with this crisis. However, recognising the potential scale of the impact, the SPU prudently includes a provision of €3 billion in 2023 to provide the funding to address the crisis while not impacting on the Core Expenditure amounts for delivery of public services and of the NDP.”
ENDS
Notes to Editors:
1. The Stability Programme Update is a legal requirement: all Member States must submit to the European Council and Commission by end-April each year.
2. The document is prepared based on existing government policies, with no new policies included, other than the estimated costs associated with Ukrainian refugees.
3. The macroeconomic analysis and forecasts contained in this document are based on data available to end-March 2022. The fiscal projections are based on data as of mid-April. The presentation provided to the IFAC is available on the Department of Finance website.
4. The unemployment rate for the first half of 2022 is based on the CSO Covid-adjusted unemployment rate which adds all PUP recipients to the standard unemployment rate. From the second half of 2022 onwards, the unemployment rate is based on the projected standard ILO rate as the PUP scheme will no longer be in operation.