The coronavirus pandemic will lead to a steep downturn in the Irish economy, but the macroeconomic outlook is especially uncertain because of potential changes to the international tax system and Brexit, Ireland’s budget watchdog said.
In its May 27 report evaluating the Irish government’s Stability Programme Update 2020, the Irish Fiscal Advisory Council said the economy was in good shape before the pandemic but has suffered a hit because of the policy measures needed to respond to the crisis. However, those policy measures “are conducive to prudent economic and budgetary management,” the report says.
The Stability Programme Update 2020 projected that the government would have a deficit of at least €23 billion in 2020, taking into account €9.6 billion of extra spending and a €14.9 billion decline in government revenue, according to the report. That deficit is projected to shrink slightly to €13 billion in 2021 if the economy recovers, it added. The update was published April 21 and sent to the European Commission on April 30; the commission responded in its May 20 country report.
There is a high degree of uncertainty associated with the coronavirus pandemic and its potential health and economic effects, according to the Irish Fiscal Advisory Council's report. “A hard Brexit, changes to the international tax system, and further global trade disruptions pose further risks,” the report adds.
Specifically, the report flags risks to corporation tax receipts, pointing to the OECD’s base erosion and profit-shifting project as a prime example. Ireland’s Department of Finance has estimated that implementing BEPS project measures might result in corporation tax losses starting in 2022, possibly leading to losses of up to €2 billion by 2025.
International tax changes in general may also affect foreign investment in Ireland, according to the report. “Protectionist measures by the U.S. and other nations could escalate further, weakening global trade,” the report says. “And adverse financial developments could spill over to the Irish economy.”
Brexit may also hit the Irish economy hard, especially if the United Kingdom is not able to strike a trade deal with the EU, according to the council. “There is considerable uncertainty about how Brexit will interact with the global pandemic,” the report says. “There is the potential for a global recession and collapse in world trade that could significantly amplify the negative consequences.”
Because of the highly uncertain macroeconomic environment during the coronavirus pandemic, the report sets out three possible scenarios: a mild scenario, under which the economy improves quickly and experiences only minimal damage; a central scenario, in which confinement is relaxed with some lasting effects; and a severe scenario, wherein the road to recovery is long and marked by multiple lockdowns and broad financial distress.
All scenarios imply that Ireland may need two to three and a half years for the economy to rebound to pre-pandemic levels, the report says, noting that by contrast, it took Ireland 11 years to recover from the 2008 financial crisis and subsequent recession.
While the Irish government must focus on limiting the fallout on health and income in the immediate crisis, it might want to consider a significant temporary targeted fiscal stimulus in the recovery phase to help the economy along, the report says. As the Irish economy heads into the new growth phase, the next Irish government will need to make difficult decisions about taxation and spending because of high debt levels and low revenues, and should not rule out spending cuts or tax increases, according to the report.
“The government has introduced large-scale policy supports, which is appropriate to tackle the immediate crisis,” Sebastian Barnes, the council's acting chair, said in a May 27 release. “The next phase, the recovery, would warrant a sizeable fiscal stimulus. While some fiscal adjustment is likely to be needed in the third phase — when the economy settles on a new growth path — severe austerity can be avoided.”
The Irish Fiscal Advisory Council’s report coincides with the May 27 release of the European Commission’s proposed 2021-2027 long-term budget, aimed at repairing the economic and social damage brought on by the coronavirus crisis.