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Significant stimulus plan needed to revive economy after Covid-19 – IFAC

The Government has been advised to introduce a “significant” stimulus plan for the economy, once the immediate Covid-19 crisis is over.

However, the Irish Fiscal Advisory Council (IFAC|) has also warned that “all options must be kept on the table”, including spending cuts and tax rises to bring the public finances back in line once the recovery takes hold.

Covid-19 will deliver a “prolonged and severe shock” to the economy, according to the council, which acts as a watchdog for the public finances.

That is why it is advising the Government to implement a “significant” plan of investment to stimulate the economy back to life. But this will have to be paid for.

It is advising an incoming Government to leave “all options” on the table through “different combinations of spending reductions and tax increases” to bring the public finances back from what is expected to be “historic” levels of public debt.

However, the council says that even under its worst case scenario of repeated new waves of coronavirus, the expected adjustment will be less than half of what was done following the financial crisis.

Speaking on RTÉ’s Morning Ireland, Sebastian Barnes, the acting chairperson of the IFAC, said that Government actions taken so far to tackle the Covid-19 crisis have been appropriate given the quick, sharp shock to the econmy and a 20% fall in economic activity in the first half of the year.

He said “it was absolutely right” given the disruption for Government to use the balance sheet quickly and to put a lot of money into the economy to ensure businesses could survive and to support people to make it through the lockdown.

The IFAC says there is considerable uncertainty surrounding the impact of Covid-19 on the economy. It also warns that the threat of a hard Brexit, changes to international tax rules and disruption to world trade all remain as risks to the economy.

It has sketched out the path it thinks the economy could take under three different scenarios which vary from “Mild” to “Severe”. The greatest uncertainty is what will happen to the virus and its impact on public health. It believes that it will take two to three-and-a-half years for activity to return to pre-Covid levels.

It recognises the high cost of income and business supports put in place by the Government but says these will help limit the economic damage.

When the economy begins to recover, it warns that some sectors like tourism and food services may struggle. It warns that some job losses may be permanent and workers may need to be retrained.

Mr Barnes said that whatever combination of spending reductions or spending freezes and tax changes are needed, it will not be on the scale the country had in 2008 to 2010 and the Council says a return to severe austerity can therefore be avoided.

It supports a “significant” stimulus plan for the economy once the immediate crisis is over. It will not put a figure on this but it uses a model of €10bn over several years to show its possible impact on the public finances.

It says the stimulus should be ‘temporary and targeted’. It also says that once economic growth picks up again, the Government will have to move to bring the public finances back from what it expects will be “historic” levels of debt.

This could involve adjustments of between €6bn and €14bn over the years 2023-2025. It warns that an incoming government will have to leave all options regarding spending and taxation open to deal with this.

Even with this adjustment, IFAC sees the Government still running budget deficits out to 2025 which could range between €3bn and €11bn depending on how the economy fares.

It warns that although interest rates are low now, Ireland had a high level of debt going into this crisis and that an even higher level of debt leaves the country “vulnerable to further shocks in the future”.

It is encouraging an incoming government to set debt targets, set realistic medium-term budgetary forecasts and save any temporary gains from unexpected windfalls in a re-jigged Rainy Day Fund.

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