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Government gets EU ok to continue running big deficits well beyond Covid

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Minister for Finance Paschal Donohoe. (Julien Behal/PA)

Minister for Finance Paschal Donohoe. (Julien Behal/PA)

Minister for Finance Paschal Donohoe. (Julien Behal/PA)

The Irish Government and peers across the EU will be able to run large deficits until 2023, with Brussels’ blessing.

In a communication on Tuesday, the European Commission encouraged member states to keep “supportive” spending and tax policies in place through 2022, promising they will not be constrained by EU debt reduction rules.

“There is hope on the horizon for the EU economy, but for now the pandemic continues to hurt people’s livelihoods and the wider economy,” said Commission vice-president Valdis Dombrovskis.

“To cushion this impact and to promote a resilient and sustainable recovery, our clear message is that fiscal support should continue as long as needed.”

The news comes a day after the Government announced the budget deficit has ballooned to €14bn, on a 12-month basis, with February spending up 11pc year-on-year.

Since last March, the EU has activated a ‘general escape clause’ from its 3pc of GDP deficit limit and its 60pc debt ceiling.

The latest CSO figures available show Ireland’s deficit was around twice the EU limit in the third quarter of last year, while debt was just over 62pc of GDP.

Mr Dombrovskis said on Tuesday that the debt and deficit opt-out will remain in place for 2022 but will be “deactivated in 2023”, provided GDP has recovered to pre-pandemic “trends”.

In Tuesday’s communication, the EU said member states that have not seen output recover to end-2019 levels by 2023 will be able to use “all the flexibilities” within EU rules.

It’s an important signal to investors, following volatility in global debt markets last week.

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“One year on, the battle against Covid-19 is not yet won and we must ensure that we do not repeat the mistakes of a decade ago by pulling back support too soon,” said EU Economy Commissioner Paolo Gentiloni.

“For 2022, it is clear that fiscal support will still be necessary; better to err towards doing too much rather than too little. At the same time, fiscal policies should be differentiated according to the pace of each country’s recovery and their underlying fiscal situation.”

Tuesday’s paper urges finance ministers to fine-tune supports and use more “targeted” measures as the recovery gains ground later this year and in 2022.

It said governments should avoid creating a permanent burden on the public finances and only support “viable but vulnerable firms”.

The bloc is urging countries to use funding from its emergency Recovery and Resilience Facility, which it says will not add to national debt under EU calculations.

Ireland has been promised €853m from the fund.

The EU will confirm its position on the debt and deficit opt-outs when it publishes its next economic forecast in May.

At that time, it will also issue its annual country-specific economic recommendation, based on tax and spending outlines to be sent to Brussels in April.

The EU is also mulling a wider overhaul of its debt and deficit rules, first put in place in the 1990s and beefed up during the last financial crisis.

Critics say the rules are pro-cyclical, forcing countries to reduce debt too fast when the economy is at its weakest.


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