Prudent government borrowing can mitigate inadequate housing supply and upward pressure on prices and rent

In this paper, we address the undersupply of residential housing. Given the recent, adverse impacts of pandemic-related public health restrictions on housing supply, we argue that a significant increase in the provision of publicly provided housing is now required to help bridge the growing gap between actual supply levels and the structural demand for housing.

To investigate the public financing of such an investment we examine the future conduct of Irish fiscal policy. Given the expected strong post-COVID-19 performance of the Irish economy and the likely continued low cost of sovereign debt, we argue that the adoption of a consistently negative Government primary balance can be pursued under a prudent and sustainable set of conditions. Such a policy, which would be specifically for capital expenditure purposes, could provide the exchequer with an additional annual amount of between €4bn to €7bn.

This work follows a growing international debate which is exploring the issue of a more expansionary fiscal policy in the aftermath of COVID-19 [1].

The paper outlines a set of principles which would oversee Government policy in this area. Crucially, the level of borrowing outlined in the paper will still enable the State to have a fiscal buffer in place to meet either anticipated or unanticipated shocks to the economy.

Commenting on the report, author Kieran McQuinn of the ESRI stated:

“While there are many pressing demands for additional State capital investment, without significant investment in residential construction, we risk experiencing another decade of inadequate housing supply and resulting upward pressure on residential prices and rents.”

[1] See Schnabel (2020). Schnabel I. (2020). The ECB’s response to the COVID-19 pandemic, Remarks by Isabel Schnabel, Member of the Executive Board of the ECB, at a 24-Hour Global Webinar co-organised by the SAFE Policy Center on “The COVID-19 Crisis and Its Aftermath: Corporate Governance Implications and Policy Challenges” available online here.