COVID-19 and the Public Finances in Ireland

Thomas Conefrey, Rónán Hickey and Niall McInerney
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Thomas Conefrey: Central Bank of Ireland
Rónán Hickey: Central Bank of Ireland
Niall McInerney: Central Bank of Ireland

No 3/EL/21, Economic Letters from Central Bank of Ireland

Abstract: The fiscal response to COVID-19 in Ireland has been significant, with the increase in public spending the second largest in the euro area in the first three quarters of 2020. The necessary fiscal actions have supported the health system and protected the economy from the worst effects of the pandemic. ECB policy has also played an important role in the crisis response – easing financing conditions and boosting growth in the euro area and in Ireland. Policy support will need to be maintained over the short-term in order to stabilise the economy. When health risks diminish, any ongoing support via current expenditure should be targeted and temporary. Outside Covid-19, our analysis shows that permanent increases in current expenditure could only be sustainably accommodated if accompanied by offsetting revenue raising measures. Long-lasting increases funded by debt would amplify the risks to fiscal sustainability and potentially limit the scope for an expansionary fiscal response to future crises.

Date: 2021-03
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