Governor’s pre-budget letter published

• Policy should focus on supporting the productive capacity of the economy.
• The rise in the public deficit and debt ratios has been both warranted and necessary but a path to lower and more sustainable levels will eventually have to be taken.
• Need for a continued focus on building economic resilience to future shocks, including considering longer-term intergenerational issues in budget planning.

The Central Bank of Ireland has, today, published the pre-budget letter from Governor Gabriel Makhlouf to Minister for Finance, Paschal Donohoe, ahead of Budget 2021.  The Central Bank submits its budget recommendations to the Department of Finance annually in accordance with its mandate to provide analysis and comment to support national economic policy development.

In the letter the Governor writes that policy should focus on three areas:

1. The need to support the productive capacity of the economy to avoid scarring effects such as long-term unemployment.
2. The rise in the deficit and debt ratios has been both warranted and necessary but a path to lower and more sustainable levels will eventually have to be taken.
3. The need for a continued focus on building resilience to future shocks, such as the ongoing impact of the UK's withdrawal from the EU, the challenges of international tax reform, climate change and, in the longer-term, demographic change.

In the letter the Governor acknowledges that “The actions taken to contain Covid-19 has caused a sudden and severe contraction in economic activity across the world and has posed an unparalleled challenge to governments and policymakers everywhere.”  

On the economic impact of Covid-19 the Governor wrote that “Real-time data for the Irish economy point to a trough in activity being reached in April, with current activity now above this low point, as the economy has started to re-open. Reflecting this, there has been a strong rebound in some elements of spending but with continuing weakness still evident in other areas.”

Commenting on the impact on individual households and sectors the Governor said the “shock to household incomes has been mitigated by the provision of large-scale income supports, precautionary behaviour has intensified, evidenced most clearly by the sharp rise in household savings. How these savings are used will be important in shaping the recovery from the current downturn.”  He added that although there have been some signs of improvement – following the phased reopening of the economy – the overall level of activity still remains well below pre-Covid-19 levels and the challenge ahead will be to move from tentative re-opening to sustainable recovery.” On SMEs, the Governor highlighted the important role they play within the local economy, the challenges they face and some of the key issues around supports they will likely need going forward.

On the future evolution of the public finances, the Governor wrote: “it remains important for the Government to provide a clear, credible and time-bound return to much lower and sustainable deficit and debt positions” and that, once the outlook was clearer, the Government should “be prepared to deliver a more ambitious reduction in the debt ratio than required under fiscal rules, along with a firm commitment to use any future windfall revenues to reduce debt rather than support increased expenditure.”

On building economic resilience, the Governor wrote “the path ahead for policy must also focus on addressing longer-term challenges as well as building economic resilience to future shocks” and that consideration be given to “broadening the medium-term expenditure framework so that longer-term intergenerational issues are recognised explicitly, explained to the community and addressed in a planned and managed way”.

Notes

Previous pre-budget letters are published on the Central Bank website.