Coalition’s choice of way forward broadly applauded but warning given as to risks
The path of a lighter budget and rejection of a credit line needs growth for it to work
Prof John McHale: The most likely growth number for 2014 is 2 per cent but, because the risks are tilted to the downside, the actual expected growth is actually something less than that.
The fragility of the Government’s position as it exits the bailout without a special credit line is laid bare in a new report from the Irish Fiscal Advisory Council, the body set up in 2011 to monitor economic policy.
At issue primarily are two big plays by the Coalition. First was the manoeuvre in Budget 2014 to opt for a €2.5 billion retrenchment instead of the mooted €3.1 billion. Second was the decision not to seek precautionary credit.
While the council’s reservations about both actions were made clear at the time, it has fleshed them out in detail in a 128-page Fiscal Assessment Report. This examines from an independent standpoint whether the Government policy passes the credibility test. As the troika leaves Dublin, the objective remains that such reports will become established as an important national barometer.
Core fiscal strategy
The council’s message is straightforward. It has no real complaint with the Government’s core fiscal strategy. But it differs appreciably on the fine-tuning – and the fine-tuning is crucial. In spite of the progress made, the Coalition is cutting it rather thin.
For all the positive rhetoric from Taoiseach Enda Kenny and Tánaiste Eamon Gilmore, something akin to a economic limbo dance is afoot. Fine if everything goes their way. But any little tip off-balance would spell danger.
There is no safety margin at all in Budget 2014 to allow for any shortfall in economic growth. This raises the prospect of increased retrenchment in 2015 if the all-important 3 per cent deficit target is to be met that year. Amid signs that growth elsewhere in the euro zone is faltering, the potential to create significant political difficulty is clear.
“The most likely growth number for 2014 is 2 per cent but, because the risks are tilted to the downside, the actual expected growth is actually something less than that,” said council chairman Prof John McHale. “So if the Government is serious about meeting that 3 per cent target, it’s certainly possible that additional adjustment beyond the €2 billion already forecast for Budget 2015 could be required.”
A further €690 million would be needed if nominal economic growth fell back to 1.5 per cent in 2014 instead of the forecast 2 per cent. This would bring the 2015 retrenchment close to €2.7 billion, far greater than in the 2014 budget. Worse still would be the €3.29 billion needed if growth was projected to fall back again in 2015 .
Near the end of a prolonged austerity drive, any such move would reverse the current trend. If that is unpleasant enough on its own terms, doubly unappealing for the Government is that it would come in a pre-election year.