Budget 2021: Emerging economic and fiscal situation...13th October Presentation of Budget 2021 15 th...

Budget 2021: Emerging economic and fiscal situation

Presentation to Tax Strategy Group

John McCarthy, Chief Economist

10th September 2020

2 An Roinn Airgeadais | Department of Finance

Birds-eye view

• Economic fall-out from lockdown

• Post-lockdown developments

• The public finances

• Summary and conclusions


Economic fallout from lockdown


External developments: global symmetric shock

Record GDP fall in key trading partners Share of global economy in lockdown

Source: a) DoF and b) Macrobond

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

07/0

1

13/0

1

19/0

1

25/0

1

31/0

1

06/0

2

12/0

2

18/0

2

24/0

2

01/0

3

07/0

3

13/0

3

19/0

3

25/0

3

31/0

3

06/0

4

12/0

4

18/0

4

24/0

4

30/0

4

06/0

5

12/0

5

18/0

5

24/0

5

30/0

5

05/0

6

11/0

6

17/0

6

23/0

6

29/0

6

05/0

7

11/0

7

17/0

7

23/0

7

29/0

7

04/0

8

10/0

8

16/0

8

22/0

8

28/0

8

03/0

9

China

Italy

Japan

South Korea

Ireland

Portugal

Belgium

Spain

Saudi Arabia

Canada

Russia

Switzerland

Turkey

Rest of EU

Mexico

Brazil

India

Japan

China

Norway

Denmark

Germany

Austria

Sweden

France

Netherlands

Austria

Belgium

South Korea

UK

Spain

South Africa

Thailand

Ireland

Russia

-23%

-18%

-13%

-8%

-3%

2%

Q1/2

01

9

Q2/2

01

9

Q3/2

01

9

Q4/2

01

9

Q1/2

02

0

Q2/2

02

0

United States

Euro area

United Kingdom

- 9%

-20%

-12%


Ireland: largest economic contraction on record

Surge in household savings, voluntary and involuntaryQ2: modified domestic demand = -16 per cent

-20

-15

-10

-5

0

5

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2014 2015 2016 2017 2018 2019 2020

C

G

B&C

Other modified investment

MDD

- 1,000

- 500

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan-1

7

Mar-1

7

May-1

7

Jul-1

7

Sep-1

7

Nov-1

7

Jan-1

8

Mar-1

8

May-1

8

Jul-1

8

Sep-1

8

Nov-1

8

Jan-1

9

Mar-1

9

May-1

9

Jul-1

9

Sep-1

9

Nov-1

9

Jan-2

0

Mar-2

0

May-2

0

Jul-2

0

Monthly change in deposits at commercial banks

“excess” savings = c. €5-6 bn

[partly funding the fiscal deficit]

Quarterly fall in GDP = 6 per cent

“two-speed” economy : exports of MNCs

Source: a) CSO and b) Central Bank


Fall-out in the labour market unprecedented

Unemployment rate = highest level ever [c. twice GFC rate]Change in employment levels (000’s y/y)

17.3% Dec 1985

4%June 2001

peak=16% Feb 2012

28.8% April 2020

16.7% July 2020

0

5

10

15

20

25

30

35

Jun

-83

Ap

r-8

4

Feb

-85

Dec

-85

Oct

-86

Au

g-8

7

Jun

-88

Ap

r-8

9

Feb

-90

Dec

-90

Oct

-91

Au

g-9

2

Jun

-93

Ap

r-9

4

Feb

-95

Dec

-95

Oct

-96

Au

g-9

7

Jun

-98

Ap

r-9

9

Feb

-00

Dec

-00

Oct

-01

Au

g-0

2

Jun

-03

Ap

r-0

4

Feb

-05

Dec

-05

Oct

-06

Au

g-0

7

Jun

-08

Ap

r-0

9

Feb

-10

Dec

-10

Oct

-11

Au

g-1

2

Jun

-13

Ap

r-1

4

Feb

-15

Dec

-15

Oct

-16

Au

g-1

7

Jun

-18

Ap

r-1

9

Feb

-20-600

-500

-400

-300

-200

-100

0

100

200

12Q

1

12Q

2

12Q

3

12Q

4

13Q

1

13Q

2

13Q

3

13Q

4

14Q

1

14Q

2

14Q

3

14Q

4

15Q

1

15 Q

2

15 Q

3

15 Q

4

16 Q

1

16 Q

2

16 Q

3

16 Q

4

17 Q

1

17 Q

2

17 Q

3

17 Q

4

18 Q

1

18 Q

2

18 Q

3

18 Q

4

19 Q

1

19 Q

2

19 Q

3

19 Q

4

20 Q

1

20 Q

2

includes for those on PUP

Source: a) CSO and b) CSO


Post-lockdown economic developments


Ultra-high frequency data confirm gradual pick-up in q3

Number of cars on Irish roads

Source: a) TII and b) Revolut

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

07

/02

/20

20

14

/02

/20

20

21

/02

/20

20

28

/02

/20

20

06

/03

/20

20

13

/03

/20

20

20

/03

/20

20

27

/03

/20

20

03

/04

/20

20

10

/04

/20

20

17

/04

/20

20

24

/04

/20

20

01

/05

/20

20

08

/05

/20

20

15

/05

/20

20

22

/05

/20

20

29

/05

/20

20

05

/06

/20

20

12

/06

/20

20

19

/06

/20

20

26

/06

/20

20

03

/07

/20

20

10

/07

/20

20

17

/07

/20

20

24

/07

/20

20

31

/07

/20

20

07

/08

/20

20

14

/08

/20

20

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

07/0

2/2

02

0

21/0

2/2

02

0

06/0

3/2

02

0

20/0

3/2

02

0

03/0

4/2

02

0

17/0

4/2

02

0

01/0

5/2

02

0

15/0

5/2

02

0

29/0

5/2

02

0

12/0

6/2

02

0

26/0

6/2

02

0

10/0

7/2

02

0

24/0

7/2

02

0

07/0

8/2

02

0

21/0

8/2

02

0

Schools Closephase 1 phase 2 phase 3

Payment transactions [‘Revolut’]

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


Initial bounce-back during the summer

Unemployment / under-employment extremely highRetail sales [=goods] suggest release of pent-up demand

0

20

40

60

80

100

120

Jan-2

0

Fe

b-2

0

Mar-

20

Apr-

20

May-2

0

Jun-2

0

Jul-20

January

2020 =

100

Schools close

12th March

Full lockdown

27th March

Phase 1

18th May

Phase 2

8th June

Phase 3

29th June

….though purchase of services lower

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

23-M

ar

30-M

ar

06-A

pr

13-A

pr

20-A

pr

27-A

pr

04-M

ay

11-M

ay

18-M

ay

25-M

ay

01-J

un

08-J

un

15-J

un

22-J

un

29-J

un

06-J

ul

13-J

ul

20-J

ul

27-J

ul

03-A

ug

10-A

ug

17-A

ug

24-A

ug

31-A

ug

07-S

ep

Pandemic Unemployment Payment Live Register TWSS (currently in receipt)

Phase 2

June 8thPhase 3

June 29thPhase 1

May 18th

Total = c. 800 K

peak = 1.2m

PUP = 219 K

LR = 217 K

TWSS = 360 K

Source: a) CSO and b) DoF calculations


Economic outlook

• For 2020:

: MNC sector has done most of ‘heavy lifting’ [imports a ‘shock-absorber’]

: severe hit in Q2, partial bounce-back in Q3, modest growth thereafter

: NX likely to positively contribute to growth, with negative contribution from MDD

• For 2021: key assumption = no vaccine

: continued modest growth throughout 2021

: EU-UK trade relationship?

- tariffs

- non-tariff barriers

- supply-chain disruption

• For 2022 onwards: scarring effects? [equilibrium unemployment / lower productivity]

: legacy effects? [public debt overhang / spillovers to banking sector / re-(near-)shoring / deglobalisation]


Public Finances

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


Fiscal position – must remain ‘in the pack’

• Outlook: (currently being revised)

- discretionary measures €24 billion = large by international standards

- deficit of up to €30 billion = -10% GDP (-17% of GNI*)

- part structural (un-related to economic cycle)

- debt of 125% of GNI*

- amongst the highest in the developed world

- rise further next year

- revenue base v. exposed to corporation tax receipts

• Debt will have to be re-financed in coming years- at a higher rate / cost

- market sentiment can change rapidly (eg. 2008 / 09)

- removal of ECB support in June next year


Public debt – large and rising and high vs peers

Gross debt, per cent of GDP/GNI*, SPU forecast

40

50

60

70

80

90

100

110

120

130

2015

2016

2017

2018

2019

2020

2021

debt-to-GDP ratio

debt-to-GNI* ratio

projections

0

10,000

20,000

30,000

40,000

50,000

60,000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

f

20

21

f

EU 25th to 75th (interquartile range)

Ireland

Debt-per-capita, IE relative to EU27 second and third quartiles. €

Source: a) CSO and b) DoF calculations


Summary

• Economy in finely balanced position

- shock = disproportionate impact on labour-intensive service sectors

• Labour market has borne the brunt

- some firms / sectors no longer viable

- pace of technological change has accelerated (on-line shopping / payments)

• Budgetary policy must walk a fine line

- support economy

- ensure fiscal sustainability

• Disorderly Brexit will impose additional economic and fiscal costs

• Any loss of corporation taxation receipts would have serious consequences for sustainability


Next steps

Date Event

20th September Finalisation of economic forecasts and transmission to IFAC

29th September Presentation of IFAC Council

2nd October Publication of q3 exchequer numbers

9th October Publication of White Paper

13th October Presentation of Budget 2021

15th October Submission of DBP to European Commission / Council

Q4 Publication and enactment of Finance Bill / Social Welfare Bill / etc.


Disclaimerand other information:

The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the Department of Finance, the Minister

for Finance or the Government of Ireland.

Outturn data are sourced from a variety of sources including the Department of Finance, Central Statistics Office, European Commission (AMECO) and

CentralBank of Ireland.

For the latestpublication’s followthe Department of Financeon socialmedia:

@IRLDeptFinance Department of Finance Ireland

https://twitter.com/IRLDeptFinance https://www.linkedin.com/company/department-of-finance-ireland/

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https://www.linkedin.com/company/department-of-finance-ireland/

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