Ignoring advice of the fiscal council carries real risks

Economic growth has run ahead of forecast over the past couple of years andso the Government has been able to largely ignore the advice of the Irish Fiscal Advisory Council (IFAC) that it should move more quickly to cut the budget deficit.

The Government upped the stakes in October’s budget and the latest report from IFAC clearly outlines the risks it feels this involves.

In the budget, the Government went ahead with a €1 billion stimulus, when the IFAC – along with the EU Commission and the IMF – was calling for it to stick to the original plan of another €2 billion in cuts and taxes. In criticising the Government for doing this, the council makes two key points.

One is that the job of eliminating the need to borrow to run the State will now take longer to complete.

Political flak

Given the political flak over the water charges, the Government will argue that imposing yet more austerity would have been impossible. The net cost of the water charges to the public will now be around €150 million – a pittance compared to the pain that another €2 billion in austerity would have brought.

So the Government took a political decision, albeit one that backfired because of the mess over water.

However ministers will be quietly concerned about the council’s second point, which is that if economic growth comes in below forecast, the figures could quickly run into trouble. If growth next year comes in at 3.2 per cent, rather than the forecast 3.7 per cent, then the 3 per cent deficit limit – which we are obliged to hit under EU rules – could be overshot, IFAC warns. And if the euro zone recession hits us and growth is nearer 2 per cent, borrowing might not fall at all from this year’s expected out-turn of 3.7 per cent of GDP.

With exchequer returns suggesting the budget is ahead of target and growth indicators reasonably strong, the Government may be relaxed about this for the moment. The risk it faces is another euro zone downturn hitting growth here. This could limit the Government’s room for manoeuvre in the next budget, the last one due before the general election.

The IFAC says the Government also faces other challenges in getting its figures on target. Medium-term tax forecasts in the budget do not factor in promises made to cut taxes further. Spending increases in the forecasts are not reflected in the budget projections for the public finances. In other words, the Government still has to identify how to pay for promises to increase spending and cut taxes and meet pressures emerging on departments’ budgets.

Stronger growth would paper over these, but the IFAC is sending out a message that we need to move beyond the approach summed up by former finance minister Charlie McCreevy’s dictum that “ when I have it, I spend it”.

With the Government under pressure and a general election looming, there is a strong chance that, like so much of the council’s advice, this too will be ignored.