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A presentation by the chief economist of the Finance Department describes the downturn in the economy in the second three months of this year as “the largest economic contraction on record.”
He also warns that budget policy will have to walk a “fine line” between support and “fiscal sustainability.”
Chief Economist John McCarthy’s presentation to the Fiscal Strategy Group describes how Modified Domestic Demand, a measure that excludes the multinational sector, fell 16% in the second quarter of this year.
He points out that GDP only fell by 6%, which highlights a ‘two-speed’ economy, with multinationals continuing to export.
Mr McCarthy also draws attention to the “excess” of household savings amounting to 5 billion euros.
He notes that unemployment peaked in April at 28%, which was double the highest level recorded during the financial crisis.
However, a recovery in the economy is currently underway after an initial “rebound” during the summer.
The number of people on the Live Register, the PUP and the wage subsidy scheme remains high, although as of last week 800,000 received support.
The multinational sector is described as having done most of the ‘heavy lifting’ in the economy this year, helping to mitigate the negative impact of domestic demand.
For the next year, the question mark on the future trade relationship between the EU and the United Kingdom is observed, as well as the possible threats of tariffs and the interruption of supply chains.
On public finances, the document indicates that our national debt is among the highest in the developed world.
Debt is expected to increase even more next year and the exposure of the tax base to corporate tax stands out.
He points out that any debt we take on now will have to be refinanced in the future at a higher cost and that the ECB is expected to end its support in June next year.
The economy, he concludes, is in a ‘finely balanced position’ with the impact of COVID-19 that has had a disproportionate impact on labor-intensive sectors.
He says that budget policy will have to walk a fine line between support and what he describes as “fiscal sustainability.”
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