gov - Address by the Minister for Finance Paschal Donohoe TD to the National Economic Dialogue (NED)

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Introduction

I would like to thank the Taoiseach for his opening address and also our Chair, Alan Barrett, for his opening remarks and for once again agreeing to chair our discussions.

It has been two years since the last National Economic Dialogue, as last year’s event did not go ahead due to the pandemic.

This time last year, we were all, in this country and elsewhere, learning to adapt to the new realities of virtual meetings and conferences.

For better or worse, we are all well-versed in the new digital practices now, including events like today’s.

Nonetheless, I want to thank you all for taking the time to log-in and participate in this year’s National Economic Dialogue, which sits within the government’s wider efforts to strengthen social dialogue.

As Alan has flagged, the structure of the event has changed, to reflect the virtual format.

There is a greater focus on the break-out groups, the number of which has been expanded to ten. This reflects the all-encompassing nature of the pandemic, which has affected every sector of our society and economy.

However, the impact of the crisis has not been symmetric. Different sectors and parts of society have been affected in different ways.

While we will all benefit from the upturn which is now underway, the recovery will also be diverse in its impact. Some sectors are already regaining pre-pandemic levels of activity, while others will need to change and adapt to reflect a post-pandemic environment. Government policy needs to reflect this reality.

The aim of this year’s NED, therefore, is to foster discussion on how best to ensure that the recovery addresses the many competing economic and social priorities within the limited resources available.

Before we separate out into the individual sessions, I want to give a sense of the overall macroeconomic and budgetary context for our discussions.

Economic Context

We are all aware of the brutal impact that the COVID-19 crisis has had on the domestic economy. The reintroduction of public health restrictions at the end of last year led to a further contraction in the first quarter of 2021.

However, the decline in activity was not as severe as that seen during the first lockdown last spring.

Modified Domestic Demand (MDD), which provides the best measure of domestic economic activity, fell by 5 per cent on an annual basis in the first quarter of 2021, as compared with a fall of 15 ½ per cent in Q2 last year.

This is clear evidence that in the face of some of the most stringent restrictions across advanced economies, firms and consumers have adapted their behaviour.

In addition to our economy becoming more resilient, the vaccination programme is also having a positive effect. While the number of COVID-19 infections still remains too high, case numbers have fallen significantly from the peak in January and the incidence among all age groups has declined.

As a result of this progress, the government began easing restrictions in early April and this relaxation has subsequently gained pace, allowing the economy to start to recover in the second quarter.

Various indicators confirm this, including a range of business and consumer confidence indicators, daily card payment data, as well as May’s tax receipts.

The labour market will take more time to recover, but this will be facilitated by more labour intensive sectors coming back on stream.

Encouragingly, an improvement can already be seen from the PUP figures, which have fallen from a peak this year of 481,000 in February to 245,000 as of June 21st, with further falls expected in the coming weeks.

We have seen some evidence of price pressures, both domestically and internationally, and these need to be carefully monitored. However, at the moment, my department’s central expectation is that these pressures are transitory.

Economic Outlook

In previous iterations of this Dialogue, we would have a presentation on the economic outlook. Given the constraints we are working within, this has not been possible and so let me briefly say a few words on this topic.

My department published updated macroeconomic forecasts as part of the Stability Programme Update (SPU) in April. The projections assumed that the pace of vaccination would accelerate from the second quarter of this year.

Under these assumptions, my department was forecasting GDP growth of 4½ per cent in 2021 and 5 per cent for next year.

Modified Domestic Demand was projected to increase by 7½ per cent next year, as pent-up consumer and business demand is released, along with an unwinding of a portion of the excess household savings built up during the pandemic. The exact pace of growth will, of course, be dependent upon the pace at which personal savings are normalised: the sheer size of accumulated savings and the elevated savings rate are so high that they can move the dial on the overall growth rate.

Overall, the recovery is expected to gain momentum from the summer onwards as the vaccination programme progresses and further restrictions are lifted.

Budgetary Context

As I said at the outset, the government put in place unprecedented budgetary measures to combat the virus and support the economy.

Up to €38 billion was made available over two years to sustain personal incomes, invest in our health service and protect businesses. This is an extraordinary level of support and is equal to almost a fifth of national income as measured by GNI*.

In doing so, the government has made use of the full suite of fiscal tools available to it, including direct public expenditure, the taxation system and ‘below the line’ supports, such as credit guarantees.

The total value of payments made to-date under the government’s three main support schemes – the PUP, EWSS (TWSS) and the CRSS is over €14.5 billion, of which over €5 billion has been spent this year so far.

I have no doubt that this was the correct approach. We have borrowed heavily, but in a counter-cyclical manner to minimise the negative economic effects of the pandemic.

Budgetary Strategy

While we still have much to do to defeat the pandemic, it is already clear that the macroeconomic context against which the forthcoming budget will be framed is one in which economic recovery is gaining significant momentum.

Against this backdrop, it is important that fiscal policy evolves to reflect changing circumstances.

Put simply, we cannot continue to run a strongly expansionary budgetary policy while growth accelerates.

To do so, would imply a shift from the pursuit of counter-cyclical policy during the crisis to a massively pro-cyclical stance during the recovery, which would undermine the sustainability of our public finances.

To put this in context, it is worth stressing that, by the end of this year, Irish public sector debt will stand at close to a quarter of a trillion euro.

The government knows that we must put in place supports to aid our economy as it recovers. We have done this. We could do it thanks to the health of our public finances before the disease arrived to our country. We will need to regain that health again.

In addition, we know that we face a number of structural budgetary challenges in the coming years.

Our population is projected to age at one of the fastest rates in Europe over the coming decades, placing significant pressure on the public finances to meet increased costs related to pensions, healthcare and long-term care for our citizens.

The need to achieve a just transition to a carbon-neutral economy and reduce our emissions in line with pre-existing government commitments will also pose a significant challenge to the public finances.

Finally, as I have stated recently, prospective changes to the international taxation environment will have implications for our corporation tax receipts, which have contributed significantly to our tax revenues in recent years.

These challenges are clear and we know their nature in advance, which makes it imperative to put steps in place now to address them.

Commission on Taxation and Welfare

I want to highlight the important role that the Commission on Taxation and Welfare will play in this regard.

The Commission has been convened to independently consider how best the taxation and welfare systems can support economic activity and promote increased employment and prosperity, while ensuring that there are sufficient resources available to meet the costs of the public services and supports in the medium and longer term.

The Commission will take a long-term, strategic view of the taxation and welfare framework necessary for Ireland as we move past the COVID-19 recovery and beyond.

Concluding remarks

We, as a country, have been through a lot in the past fifteen months. It has been a difficult and sometimes traumatic experience, where we have faced challenges that we had never foreseen.

Thanks to the success of the vaccine roll-out programme, we can now see light at the end of the tunnel.

We have worked hard to get to where we are. The decisions we make now will ensure that we use this platform to build a better future, one that is prosperous, fair and sustainable in every sense.

In order to achieve this, we must face-up to the challenges ahead and recognise the trade-offs involved.

I would encourage all participants today to take this into account in their contributions.

By way of conclusion – I look forward to a constructive discussion today and tomorrow – which I hope will provide a basis for further progress.

Address by the Minister for Finance Paschal Donohoe TD to the National Economic Dialogue (NED) - Economic and fiscal context