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Borrowing necessary but we will be left vulnerable, Central Bank warns

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Call: Gabriel Makhlouf wants Government action over the level of debt. Photo: Vivek Prakash/Bloomberg

Call: Gabriel Makhlouf wants Government action over the level of debt. Photo: Vivek Prakash/Bloomberg

Call: Gabriel Makhlouf wants Government action over the level of debt. Photo: Vivek Prakash/Bloomberg

The boss of the Central Bank will today warn TDs that Ireland's high level of debt leaves the Government's finances "vulnerable to future shocks".

Governor Gabriel Makhlouf will say that the rise in the deficit as the Government borrows to tackle the coronavirus crisis is "warranted", "necessary" and "currently affordable".

But he will tell the Dáil's Special Committee on Covid-19 Response that it does leave the State vulnerable to challenges posed by the implications of Brexit, international tax reform and climate change.

The budget deficit is estimated to reach between €23bn and €30bn due to borrowing to fund the massive initiatives such as the Covid-19 Pandemic Unemployment Payment and the Temporary Wage Subsidy Scheme, as well as the need to inject resources into the health service.

Mr Makhlouf will tell TDs: "The high level of debt will leave Government finances vulnerable to future shocks and it will be important for the Government to provide a clear and credible return to much lower and sustainable deficit and debt positions."

His statement to the committee also says that households, businesses and the financial system have entered the current crisis in a more resilient position compared to the onset of the financial crisis a decade ago.

Mr Makhlouf will say that future policy should "continue to focus on supporting the productive capacity of the economy and avoiding scarring effects such as long-term unemployment".

He will add: "Any such action by the Government is likely to be costly in the near term but will benefit the fiscal position over the medium term if it is effective in reducing the degree of damage to the economy's productive capacity."

The Government is currently planning a July jobs initiative stimulus package to be announced later this month.

Mr Makhlouf will tell TDs that the Central Bank's primary focus since March had been on ensuring the financial system absorbed the coronavirus shock, supporting households and firms through the crisis and being ready to support the recovery.

He says the economic outlook is "very uncertain" and "the path ahead for the economy will depend on the future path of the virus, the degree to which containment measures need to remain in place or be reintroduced, and the immediate and longer-lasting effects on behaviour and economic activity".

Mr Makhlouf will outline two scenarios that have been set out by the Central Bank.

The first is an assessment of what would happen if the easing of coronavirus restrictions takes place as planned.

Unemployment would fall from a peak of 25pc to around half that by the end of 2020. GDP would be down 9pc but there would be a recovery to pre-crisis levels by 2022.

Under the severe scenario, GDP would fall by 13pc this year and not recover until 2024. Neither scenario takes into account a possible no-trade-deal Brexit.

Senior National Treasury Management Agency official Frank O'Connor will also appear at the committee. He will tell TDs that the State is "in a strong position to meet its borrowing requirements".

Irish Independent


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