Government needs to stick to €2bn adjustment, says fiscal advisor

Prof John McHale says backtracking would suggest ‘worrying weakening’ of commitment to new framework

Professor John McHale. Photograph: Dara Mac Dónaill/The Irish Times

Professor John McHale. Photograph: Dara Mac Dónaill/The Irish Times

Thu, Jul 24, 2014, 10:03

The Government needs to stick to an adjustment of €2 billion in the budget as any “backtracking on planned adjustments could suggest a worrying weakening of the commitment to the new fiscal framework”, the chair of the Fiscal Advisory Council has said.

Professor John McHale, who is professor of economics at NUI Galway said recent healthy Exchequer returns and national account figures had increased the likelihood that the target can be met with an adjustment of less than €2 billion in Budget 2015.

Speaking at the MacGill summer school in Glenties, Co Donegal, he said substantial risks remained, however, notably in relation to the prospects for domestic demand.

“Yet this nominal deficit target is just one element of the fiscal framework that has put in place.

Ireland has also undertaken to pursue an adjustment path for the deficit adjusted for cyclical and once-off factors.”

Prof McHale said this path for the ‘structural deficit’ was closely related to the long-planned budgetary adjustment of €2 billion for Budget 2015.

“If anything, the planned path of the structural deficit is the more fundamental feature of the new framework, and will become the main focus after 2015.

“Following the bailout programme exit and recent elections, any backtracking on planned adjustments could suggest a worrying weakening of the commitment to the new fiscal framework.”

The Fiscal Advisory Council is designed to act as a counter to political pressures on the Government to adopt unwise economic policies.

Separately, the former secretary general of the Department of Finance said it had now built up a much better risk function in recent years since the financial collapse and there was now a “much more robust extra line of defence”.

John Moran the important thing was that people were now “not afraid to ask the stupid questions”.

Speaking in a personal capacity, told the Dublin Chamber economic session that what had originally exposed the fragility of our economy in 2008 was an activity outside Ireland.

“Lehman did not cause our problems - it exposed our problems,” he said.

It was important that we understand and think about the external events.

We now had some very good news on the international front and the “dangerous tail risks” were dissipating.

But Mr Moran said he saw “quite a lot of risks” on the horizon and we needed to think about the hard decisions we were going to have to make in the next 12 to 18 months.

Focusing on a number of risks that remained for the economy, Mr Moran said: “It’s not plain sailing out there. A lot of stuff is outside our control and we just need to make sure that we have protected ourselves and worked through to put ourselves in a stronger position again.”

Mr Moran said it was also going to be a “particular challenge” for the ECB to try and keep down European interest rates.