Increase in Govt spending due to Covid second highest in euro area
The increase in Government spending in response to the Covid pandemic over the first three quarters of last year was the second highest in the euro area, according to a report published by the Central Bank.
In an ‘Economic Letter’ which sets out the views of Central Bank economists rather than the Bank itself, the authors warn that any permanent increases in current spending can only be sustained if matched by revenue raising measures.
Otherwise, the report argues that there could be a permanent rise in the deficit of the public finances.
This would limit the ability of government to spend its way out of any future crisis.
The report says “…a key challenge for government in the post pandemic period will be ensuring that measures designed to be temporary do not become a permanent part of the expenditure base.”
The report observes that apart from measures to tackle Covid and its impact, there was a €5.4 billion increase in Exchequer expenditure in Budget 2021.
The report also finds that the deterioration in Ireland’s budget balance in 2020, from a surplus of 0.9% GNI* in 2019 to a deficit of 8.8% in 2020, was the third largest in the euro area.
However, the report also notes that the deficit was in line with the euro area average.
Ireland’s debt to income ratio is only expected to have recorded a ‘relatively small increase’, however, because the economy grew and some existing resources were used to finance additional spending.
The report also calculates that the actions of the European Central Bank, which kept down borrowing costs for governments like Ireland, has saved the Exchequer €192 million a year in interest payments.
The report also estimates that economic growth in Ireland this year will be boosted by 1.4% by the ongoing actions of the ECB.