Speech
Minister Donohoe Opening Statement to the European Parliament Committee on Economic and Monetary Affairs
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Published on
Last updated on
Introduction
Madam Chair of the Economic and Monetary Affairs Committee, [Ms. Irene Tinagli].
Honourable members,
Thank you for inviting me here today, in my capacity as Ireland’s Minister for Finance, and for allowing me the opportunity to contribute to this Economic Dialogue. I look forward to our exchange of views.
In my introductory remarks, I will provide a brief update, which will focus on the Irish economy and public finances. In addition, I will touch upon the progress made by Ireland under Post Programme Surveillance.
Economic Developments and Outlook
Our engagement today is timely, as my Ministry has recently published updated projections for the year in mid-April as part of the Stability Programme Update (SPU).
Ireland’s economy has made a remarkable recovery over the course of last year, with the easing of public health restrictions triggering a rebound in domestic activity and a rapid recovery of the labour market.
However, the economic and fiscal projections come at a time when the Irish economy is grappling with its third severe economic shock in as many years – Brexit, a global pandemic and now the fall-out from the war in Ukraine.
Indeed, the economic and fiscal projections set out in the SPU are prepared against the backdrop of a war in Ukraine and the associated economic and financial sanctions.
Although Ireland’s direct exposure to the impacts of the war in Ukraine is limited, second round effects will be significant. The primary channel through which the war will impact on the Irish economy is through higher energy and other commodity prices.
As a result, consumer price inflation is now expected to peak in the second quarter and average 6¼ per cent for the year as a whole. Higher energy and commodity prices will raise costs for both businesses and households. Rising costs will in turn reduce the purchasing power of households and undermine the profitability of business. This, alongside heightened uncertainty, will see firms hold back on investment.
As a result, my Ministry has revised down its forecast for modified domestic demand (MDD) growth this year by 2¼ percentage points, with growth of around 4¼ per cent now projected for this year. Next year, MDD is expected to grow by just under 4 per cent.
Overall, the central scenario is conditional on the assumption that the fallout from the conflict in Ukraine delays, rather than derails, the economic recovery enabled by the removal of all pandemic-related restrictions.
However, these forecasts have once again taken place in an environment of extreme uncertainty. As such, the margin of error around these projections is significant, with the balance of risks firmly tilted to the downside.
These risks include an escalation or broadening of the war in Ukraine, weaker-than-assumed growth in key trading partners (stagflation), and persistent supply-chain disruptions, among others.
Public Finances
For the public finances, we are projecting a budget deficit of €2 billion for this year, which would result in a cumulative deficit of almost €30 billion since 2020.
For next year, after allowing for a contingency fund of €3 billion to help address the humanitarian consequences of the Ukraine conflict, we are expecting a small surplus of €1.2 billion. However, the modest surplus currently in prospect for next year would be eliminated if there were a greater than expected increase in energy prices.
General government debt is projected to stand at just under €234 million, or over 96 per cent of GNI*, at end-2022. This is approximately €30 billion higher than end-2019, reflecting the significant fiscal supports needed throughout the Covid-19 pandemic.
As the pandemic passes, further debt accumulation would increase fiscal vulnerability.
Structural fiscal headwinds in the coming years will involve major challenges. Population ageing will involve very large increases in public expenditure while, at the same time, weighing on tax revenue growth. Reform of the international corporation tax regime will impact the public finances in Ireland. While the need to finance climate change mitigation and the transition to a digital economy will also weigh on the public finances in the years ahead.
Such challenges highlight the importance of rebuilding our fiscal buffers in the years ahead.
In relation to Budgetary Strategy, the Summer Economic Statement last year set out a pathway to meet the core objectives set out in the Programme for Government. The strategy was re-affirmed in Budget 2022 and involves:
The strategy involves three strands:
The expenditure rule involves limiting core-spending growth to around the same level of trend growth in the economy via fixed expenditure ceilings. The headline deficit will be allowed to fluctuate while keeping the ceilings fixed.
The strategy will allow Government return the public finances to a stable path, while maintaining key investment in public services, particularly public capital investment.
Progress made under Post Programme Surveillance
Finally, I will turn to progress that Ireland has made under Post Programme Surveillance.
As colleagues will be aware, Ireland has been under Post Programme Surveillance since exiting the EU-IMF financial assistance programme in late 2013.
Ireland will remain under Post Programme Surveillance until 75% of financial assistance has been repaid, which is expected to be in 2031. To date, Ireland has fully repaid the loans received from the IMF and bilateral loans from Sweden, Denmark and the United Kingdom. Under the repayment schedule, Ireland will finish repaying the remaining loans to the European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanism in 2042.
Sixteen Post Programme Surveillance missions to Ireland have taken place during this time, with the most recent mission having taken place in late March 2022. The Commission’s Staff Report for this mission is due to be published in the coming weeks, and I look forward to discussing its findings with colleagues in the Eurogroup, in line with the established practise.
Since the first mission to Ireland in early 2014, Post Programme Surveillance has marked the progress Ireland has made getting back on track after the EU-IMF programme. From our perspective, we consider Post Programme Surveillance to be an important ongoing two-way dialogue and partnership with the European institutions, the Commission and the European Central Bank as well as the European Stability Mechanism, which participates in the review missions for the purposes of its Early Warning System.
In the Post Programme Surveillance process, there generally is a high degree of consensus between the Irish authorities and the European institutions in relation to the challenges and risks facing Ireland, and it is beneficial to hear the views of the European institutions on an ongoing basis. In addition, the Commission’s staff report following each review mission is helpful, from the Irish authorities’ perspective, to hear an expert external view regarding some of the challenges and risks that we face as a country.
A key purpose of Post Programme Surveillance is to assess the ability to repay outstanding programme loans. The Commission’s conclusions in its staff reports to date have been positive regarding Ireland’s capacity to repay. Based on our engagement during the recent 16th review mission, I again anticipate a positive assessment of Ireland’s capacity to repay our outstanding loans in the forthcoming staff report.
Conclusion
I thank the Committee once again for the invitation to appear today and I look forward to the discussion.