Managing the Public Finances in Uncertain Times

Thomas Conefrey, Rónán Hickey, David Staunton and Graeme Walsh
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Thomas Conefrey: Central Bank of Ireland
Rónán Hickey: Central Bank of Ireland
Graeme Walsh: Central Bank of Ireland

Quarterly Bulletin Articles, 2022, 130-165

Abstract: The pandemic had a major impact on the public finances, resulting in an exceptional €27 billion increase in government spending up to 2021 and adding to the national debt. As the pandemic has abated, the public finances have recovered quickly. The war in Ukraine presents fresh challenges, with high inflation and new expenditure pressures adding to existing demands on the public finances. Against a backdrop of supply-side constraints and with large increases in capital spending already planned out to 2025, the analysis here shows that additional permanent current spending funded by borrowing would add to inflationary pressures and slow down the projected recovery in the public finances. These effects would be mitigated if the spending was funded by raising revenue. Lower corporation tax revenue, higher interest rates and slower growth would result in the persistence of more elevated government debt over the medium term. In the current high-inflation environment, careful management of the public finances is required to ensure sustainable economic growth and to rebuild resilience in the government’s finances following successive negative shocks.

Date: 2022-07
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