By Padraic Halpin
DUBLIN (Reuters) -Ireland plans to reduce its budget deficit more gradually than previously forecast to increase capital spending on areas such as housing and expects it to fall to 1.5% of gross domestic product by 2025 from an estimated 5.1% this year.
Ireland's finance ministry had forecast in April that the deficit would drop to 0.2% of GDP by 2025 without further policy actions. Public Expenditure Minister Michael McGrath said the additional borrowing will ensure the government tackles a years-long imbalance between housing supply and demand "head on".
"This increase is justified given the critical role that capital investment has to play in delivering on our economic, social and climate priorities. From 2023 onwards, the government will be borrowing only to finance for capital expenditure," the government said in its summer economic statement.
The finance ministry said that on the basis of the deficit-GDP projections set out, Ireland should not be a fiscal outlier and that its deficit trajectory in the coming years should be broadly in line with other European countries.
To ensure that the public finances remain on a sustainable path, the government agreed to set an expenditure rule whereby core non-coronavirus related expenditure growth is fixed at the economy's estimated trend growth rate, taking account of inflation.
While the ministry almost doubled its GDP forecast for this year to 8.8% from 4.5% due to strong export growth, the new rule means core expenditure will grow by just over 5% on average per year over the period to 2025.
Ireland's debt is forecast to peak in 2022 at 108.6% of modified gross national income (GNI*) and fall more slowly than previously anticipated to 106.3% by 2025.
GNI* is viewed by government as a more accurate measure of the size of the economy due to how Ireland's large hub of big multinationals can distort GDP.
Ireland's debt agency said it had nudged up its target funding range for the year to 18-20 billion euros from an earlier target of 16-20 billion euros due to the government's new plan.
(Reporting by Padraic Halpin and Conor HumphriesEditing by Gareth Jones)