Irish fiscal watchdog sees fewer risks of economic scarring

·2-min read
Outbreak of the coronavirus disease (COVID-19) pandemic in Galway

DUBLIN (Reuters) - The Irish government appears to be too pessimistic in its assumption of a permanent 5% loss of economic output due to COVID-19, the country's fiscal watchdog said on Wednesday, but "poorly founded" medium-term forecasts could offset any upside.

With governments trying to judge what the long-term economic "scarring" effects of the pandemic will be, the Irish Fiscal Advisory Council (IFAC) said there was "considerable upside" potential to Dublin's relatively cautious assumptions.

It said growth in sectors not affected by the pandemic - in Ireland's case a large hub of multinational firms that have acted as a "shock-absorber" during the pandemic - could offset, or possibly even exceed, lost output elsewhere.

The watchdog also noted that high-frequency indicators of consumer spending have all but recovered to pre-pandemic levels despite the government only beginning to unwind its third and longest lockdown as firms and customers adapt.

"It is not clear why a greater degree of "scarring" due to the pandemic should be expected in Ireland compared to other countries for which estimates are available," IFAC said in its biannual fiscal assessment report

"In light of the relatively resilient performance of the economy as a whole — helped by the presence in Ireland of multinational firms, — the (finance) department's relatively adverse medium-term expectations appear rather pessimistic."

However IFAC criticised the finance department's medium-term spending projections, saying they do not reflect the full cost of providing core spending commitments and also show income tax receipts growing unrealistically fast relative to incomes.

It therefore estimates that a more coherent budget deficit projection for 2025, when the government hopes to balance its books, is 1.2% of adjusted gross national income rather than the 0.3% forecast by the finance department.

The watchdog added that international corporate tax reforms represent another risk to the state coffers and that the impact could be swifter and greater than the government assumes, noting that just ten companies accounted for 56% of all corporation tax receipts last year.

(Reporting by Padraic Halpin; Editing by David Gregorio)