Economic Letter: COVID-19 and the Public Finances in Ireland

• Increase in public spending in Ireland was the second largest in the euro area in the first three quarters of 2020 and has mitigated the negative economic impact of the pandemic
• ECB policy has played an important role in the crisis response easing financing conditions and boosting the level of output by an estimated 1.4 per cent in the euro area and in Ireland in 2021
• Policy support will need to be maintained over the short-term in order to stabilise the economy. When health risks diminish, any continued support via current expenditure should be targeted and temporary

The Central Bank of Ireland has published a new Economic Letter “COVID-19 and the Public Finances in Ireland.” The research by Thomas Conefrey, Rónán Hickey and Niall McInerney 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.

The Economic Letter outlines that the fiscal support package introduced in Ireland was large in a euro area context, with the increase in primary (non-interest) government spending in Ireland the second highest in the euro area in the first three quarters of last year. The fiscal measures introduced have mitigated the impact of the pandemic on households, firms and the broader economy.

The Economic Letter analyses the effects of ECB monetary policy on output in the euro area and Ireland, noting that the ECB policy supports have been designed to preserve favourable financing conditions and to bring medium-term inflation back towards its aim of below, but close to, 2 per cent. The ECB measures ensured borrowing costs remained at exceptionally low rates in 2020, maintained access to credit for the private sector and facilitated the fiscal response in Ireland. The 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.

The Economic Letter outlines that policy support will need to be maintained over the short-term in order to stabilise the economy, noting that when health risks diminish, any continued support via current expenditure should be targeted and temporary. Referring to fiscal sustainability, the Economic Letter highlights its importance and consideration in the current environment, particularly in relation to expenditure that could prove more long lasting.

The Economic Letter notes that outside 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.

Notes

The full series of Economic Letters can be found here.