A calculated gamble
For the Economic and Social Research Institute (ESRI), the Government is taking a calculated gamble with its decision to make savings of €2.5 billion in the 2014 budget, rather than honour the €3.1 billion figure agreed with the troika of lenders, as part of the bailout programme. In its latest quarterly report, the ESRI points out that Ireland to date has met all the fiscal targets set in the programme. And it has done so by underpromising and overdelivering – by surpassing market expectations. This cautious and prudent strategy has paid off, and delivered a tangible financial dividend.
Ireland’s reputation with international lenders has been greatly enhanced as a result of the progress already made in stabilising the economy. The State’s borrowing costs have fallen sharply. And the National Treasury Management Agency (NTMA) has made a successful return to the capital markets earlier this year, where it secured new funding at attractive rates. The worry now is that the Government may overpromise and underdeliver at a critical time, as Ireland is about to leave the bailout programme. Assuming the Government does leave the programme, the economy will face much closer scrutiny by bond market investors, on whom the Government depends to finance sizeable budget deficits.
The ESRI is clearly fearful the Government may miss its fiscal targets for next year. If so, those austerity measures now deferred would instead have to be introduced in next year’s budget. That would damage hopes of a sustained economic recovery, and weaken national morale. Much, however, depends on whether the Government achieves its growth forecasts for 2014.
Despite its reservations about the Government’s proposed fiscal adjustment, the ESRI nevertheless presents an optimistic assessment of Ireland’s economic prospects, noting some encouraging signs of recovery. Rising employment and falling unemployment are seen as the “clearest signal” of the economy’s slow rebound. Where the institute forecasts an unemployment rate of 13 per cent in 2014, the Department of Finance estimate is for a slightly lower number. Either way, the trend is positive and marks a steady decline from the 14.7 per cent peak figure in 2012. Lower unemployment means a reduction in the social welfare bill, while rising employment boosts tax revenues. And as consumers start to spend more, greater signs of public confidence in economic recovery are increasingly evident.
Nevertheless, as a small open economy, Ireland remains hugely reliant on international growth to underpin national recovery. Our economic prospects in 2014 will partly be determined by next week’s budgetary choices, but largely by what happens in the world economy, and by how fast it grows.