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Ireland’s economic watchdog calls for ‘sizeable’ fiscal stimulus

Arthur Beesley in Dublin

Ireland should roll out a “sizeable” fiscal stimulus to boost its prospects of recovery after the severe downturn caused by coronavirus, the country’s economic watchdog said.

But the Irish Fiscal Advisory Council, a statutory budget oversight body, said the next Irish government faces €2bn-€3bn in annual “fiscal adjustments” to reduce high national debts once economic growth is restored.

The council’s recommendations raise the prospects of politically contentious tax increases or spending cuts after a stimulus plan, although it said severe austerity “can be avoided” in the recovery.

They come as government formation talks continue between prime minister Leo Varadkar’s centre-right Fine Gael and the opposition Fianna Fáil and Greens after an inconclusive February election, just before Covid-19 struck.

Ireland’s economy has taken a severe hit from the coronavirus lockdown, with unemployment surging to a record 28 per cent and the budget deficit potentially rising to €30bn this year after a 2019 surplus.

Sebastian Barnes, acting chairman of the fiscal council, said it could take two or three-and-a-half years to regain pre-pandemic levels of economic activity, in contrast to the 11 years it took for Ireland to recover from the 2008 crash.

Stimulus was warranted to fan the turnaround, he said, adding borrowing to fund such a programme was appropriate. Mr Barnes declined to quantify how much Dublin should spend but said a sum “of the order” of €10bn, spread out over two years, could be needed. He told reporters:

It has to be enough really to fill what is likely to be quite a big gap in demand.

But Mr Barnes also said Dublin will need to curtail spending or increase taxes to bring debt to safer levels once growth is restored because the national debt will rise to near-record levels. Such adjustments were likely to be “far smaller and shorter-lived” than following the 2008 crisis, when Ireland retrenched the budget by €29.8bn in six years. He said:

Across the severe, mild and central scenarios, the kind of amount of adjustment that would be needed would be somewhere in the range between €7bn and €15bn…Taking the central scenario — that’s spread over three years, maybe a little longer — you’re looking at three or four years of fiscal adjustment of the order or €2bn or €3bn a year.

Although health officials believe they have suppressed coronavirus in Ireland, they say it is still too early to say whether the initial loosening of restrictions last week is having an impact on infections.

Dublin reported nine further fatalities on Tuesday, bringing the total to 1,615. There were no reported deaths on Monday, the first day since the early days of the pandemic in March that no lives were lost.

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