Spending cuts and tax increases should continue, watchdog recommends

The Government should not reduce the size of the packages of spending cuts and tax increases over the next two budgets, according Irish Fiscal Advisory Council, the independent watchdog established in 2011 in order to ensure better management of the public finances.

Some government figures have suggested that the savings achieved from the deal in February on the promissory notes could allow a stretching out of the budget adjustment over a longer period.

However, the chair of the watchdog, Professor John McHale of NUI Galway, said "the Council's assessment is that the planned adjustments of €3.1 billion in 2014 and €2 billion in 2015 should not be reduced".

Echoing recent reports by the European Commission and the IMF, Professor McHale also stressed that significant uncertainties remain for the Irish economy, particularly around the prospects for growth and the capacity to meet challenging expenditure reduction targets in Health.

More positively, the margin of safety in budget targets suggested by the Council in its previous report had been “broadly achieved”. As such, the council has not repeated previous calls for additional budgetary tightening beyond current plans.

“Based on the better than expected Exchequer outturn and higher than forecast level of nominal GDP in 2012, it now appears likely that the 2012 General Government deficit will be significantly below 8 per cent of GDP, which compares with a Budget-day estimate of 8.2 per cent of GDP. This should have some beneficial carryover effects for future years,” the council said.

It went on to say that “in addition, the promissory note transaction has reduced the projected 2015 deficit by 0.6 per cent of GDP”.

Commenting on the recommendations in Dublin today, Minister for Education Ruairi Quinn said the Government had to ensure there was a “balance between growth and bugetary corrections”.

“We will honour our debts but we need time to do so. We need get people back to work, and it's trying to get those things balanced together is how we move forward,” he added.

The council’s new projections put the General Government deficit in 2015 at 2 per cent of GDP. This is below the Government’s forecast of 2.9 per cent.

A return to “State creditworthiness” would be helped if the Government secured precautionary funding arrangements for the period after the EU-IMF bailout ends (in December 2013) and if extensions to the maturities on European bail out loans were to be achieved the council said.

Commenting on the tendency among economists to be overly optimistic about recovery the council noted that “forecasters appear to have underestimated the severity of the ‘balance sheet recession’ that followed the bursting of Ireland’s property/credit bubble”.

Along with Prof McHale, the four other council members are: Sebastian Barnes, Organisation for Economic Co-operation and Development; Professor Alan Barrett, Economic and Social Research Institute; Dr Donal Donovan, University of Limerick (formerly International Monetary Fund staff) and Dr Róisín O'Sullivan, associate professor at Smith College, Massachusetts.