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Stability Programme Update 2021 As necessitated by European budgetary rules, the Stability Programme Update (SPU 2021) was published by Minister for Finance Paschal Donohoe TD in April 2021 and outlines the Department of Finance’s medium-term (2021 to 2025) macroeconomic and fiscal forecasts.
In the short-term, the Irish economy remains exposed to exogenous factors such as Covid-19, its variants, an initially lethargic delivery of the vaccination programme. However, the programme is now well underway and is anticipated to conclude in the second half of 2021. As such, SPU 2021 assumes that vaccination deployment targets will be met, and that vaccination will be effective, leading to reopening of the economy from the second half of 2021. As such, it forecasts that GDP will increase by 4.5 per cent in 2021 and 5 per cent in 2022. Beyond 2022, the SPU forecasts that the economic recovery will continue from 2023 to 2025, with spare capacity in the economy reducing in positive correlation. Overall, resilience of the Irish economy has been determined by those prosperous sectors which are commanded by multinational corporations, such as the pharmaceutical and ICT industries. Domestically, however, exposed consumer-facing sectors, such as retail and hospitality, have underwent significant contraction due to an inability to pivot to remote working. These contrasting experiences of the pandemic have once again emphasised the dual economy that exists in Ireland, explaining Ireland’s relatively strong economic performance in the interim.
Labour market The pandemic had a significant impact on the labour market, with labour-
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intensive sectors and young people experiencing greatest job losses. CSO figures for April 2021 indicate that the Covid-19 adjusted unemployment rate was 22.4 per cent. The SPU forecasts that this rate will average 16.3 per cent in 2021 before falling to 8.2 per cent in 2022, modestly continuing its descent thereafter. Following the relaxation of public health restrictions for consumer-facing sectors, the employment growth rate is expected to be 4 per cent in 2021 and 11 per cent in 2022. Likewise, compensation of employees is projected to grow by 4.1 per cent in 2021 and 4.0 per cent in 2022. This growth rate is lower than in pre-pandemic years, reflecting the likelihood that employment growth will occur in sectors with relatively low pay. However, one potential scenario is that labour market scarring delays any recovery in employment and contributes to increased long-term employment.
Inflation In common with other eurozone countries, the Harmonised Index of Consumer Prices (HICP) inflation was recorded at -0.5 per cent in 2020. As the pandemic recedes and the economy recovers, inflation is forecast to increase to 1.1 per cent in 2021 and 1.9 per cent in 2022, higher than in years prior when the inflation rate was less than 1 per cent. Contributing factors to the increased inflation rate include pent-up demand, increased oil prices and the conclusion of the temporary reduction in the standard rate of VAT.
Global economic outlook Across the world, the vaccination rollout, and expansive fiscal policies in the largest economies, such as the Next Generation EU recovery plan and the American Rescue Plan Act, have improved the global economic outlook. Economic recovery in Ireland as small, open economy will, in part, be determined by the fiscal stimuli in the key trade markets of the EU and the US. Informed by the rapid deployment of vaccination programmes in the US and the UK, the IMF forecasts robust recovery for both nations in 2021. Meanwhile, the Eurozone economy is expected to experience a comparatively weaker recovery in 2021 ahead of stronger growth in 2022.
Tax revenue There is a marginal difference between the tax revenue estimate contained in Budget 2021 and that within SPU 2021. The SPU’s estimate projects a total tax revenue of €60.395 billion, a mere €5 million above that of the Budget. Overall, it is estimated that tax revenue in 2021 will increase by 5.6 per cent when compared with 2020. Revenue growth out to 2025 is expected to be propelled primarily by an average 7 per cent annual growth in income tax and VAT receipts from 2022 to 2025. VAT recovery is reliant on the extent to which household savings are consumed as society reopens, with the Department estimating that one-fifth of excess
