OECD warns Ireland will miss budget deficit target

Despite €2bn adjustment, think tank predicts 2015 deficit of 3.1%, just outside troika-agreed 3% target

Fergal O’Brien of Ibec said the Government needed “nothing like” an adjustment of €2 billion. Photograph: Eric Luke

Fergal O’Brien of Ibec said the Government needed “nothing like” an adjustment of €2 billion. Photograph: Eric Luke

Wed, May 7, 2014, 01:00

Ireland will narrowly miss its budget deficit target for 2015 even with a planned €2 billion adjustment in the next budget, the Organisation for Economic Co-operation and Development (OECD) predicts.

Amid fresh calls for the Government to ease up on austerity, the Paris-based think tank believes the Government deficit will fall to 4.7 per cent this year, and to 3.1 per cent next year – just outside the troika- agreed target of below 3 per cent.

The prediction, made in its latest economic commentary, is based on growth forecasts for the economy of 1.9 per cent this year and 2.2 per cent in 2015, which are lower than the Government’s predictions.

“We have slightly weaker GDP growth [for Ireland] and therefore revenue is not quite so strong and the deficit is slightly bigger,” said David Haugh, head of the OECD Irish desk.

However, he said the 3.1 per cent forecast was within the margin of error of the agreed target. “The deficit projection is very sensitive to the GDP projection, and with that kind of horizon there’s quite a bit of uncertainty.”

With Ireland’s public debt still very high, Dr Haugh said there was no room for easing back on the current consolidation process, particularly if the State wanted to reduce its vulnerability to future shocks.

On that basis, the OECD recommended the Government stick to its agreed consolidation targets to keep the country’s debt “firmly on a declining path”.

Based on the troika’s forecast for the economy, a fiscal adjustment of around €2 billion is required to cut the deficit to 3 per cent of GDP by 2015.

The report comes amid a growing clamour for tax cuts in the budget and a pledge by Minister for Finance Michael Noonan to reduce the tax burden on hard-pressed middle-income earners if resources permit.

Ignore advice
Employers’ group Ibec yesterday pressed the Government to ignore the OECD’s advice, urging it instead to limit the impact of austerity in the next budget.

The group’s chief economist Fergal O’Brien said the Government needed “nothing like” an adjustment of €2 billion. “They could halve that target and still hit their targets,” said Mr O’Brien, who added less austerity could boost consumer spending.

Overall, the OECD delivered a relatively upbeat assessment of the Irish economy, predicting recovery would continue to strengthen throughout the rest of this year and next, aided by pick-up in growth in the State’s main export markets.

It forecast unemployment would continue to fall, hitting 11.4 per cent this year and 10.4 per cent next year, on the back of steady jobs growth, while “spare capacity” would help subdue wage and price inflation.

The OECD, however, warned the process of restoring health in the banking sector must be reinforced by continuing to reduce the high level of non-performing loans and repairing the bank credit channel.

It noted the level of non-performing loans in the banks – 24.6 per cent – was eclipsed only by Greece within the OECD.

It also forecast worryingly low levels of inflation – just 0.3 per cent this year and 0.7 per cent next year – warning a period of deflation would make it harder to pay down debt, and could put pressure on real wages if the whole of the euro area fell into deflation.

More positively, it said investment in the Irish economy, including housing, had “turned around”. “Growth potential should be boosted by complementing high attractiveness to foreign investment with further efforts to foster innovation across the whole economy and to ease firms’ access to capital.”

Downgrading its outlook for the global economy, it said advanced economies will increasingly have to drive the recovery as formerly fast-growing developing economies falter. As a result, it cuts its growth outlook to 3.4 per cent from 3.6 per cent.

In contrast, it upped its forecast for the euro zone to 1.2 per cent from 1 per cent last November.