Department disputes €3bn giveaway

The Department of Finance has disputed analysis from a number of stockbroker economists that the budget day “giveaways” will, in fact, be greater than the €1.5 billion indicated by the Government.

This follows the publication over the weekend of supplementary estimates showing that the Government is adding €1.5 billion to spending this year, thus increasing the spending base for 2016.

In a note yesterday, Davy stockbrokers said that by introducing the supplementary estimates, the Government was introducing a package of policy changes effectively equal to €3 billion, or 1.5 per cent of GDP, a larger stimulus that was indicated in April’s spring statement. This total is made up by the €1.5 billion of measures to be announced today and the equal amount in the supplementary estimates.

Loosen policy

“Effectively, the Government has decided to loosen policy by twice the amount we had expected,” said Davy economist Conall Mac Coille.

Goodbody stockbrokers economist Dermot O’Leary said that the estimates contained a “sleight of hand”, which gives the Government maximum scope to increase spending, while staying within the EU rules. The Government is sticking to the letter of the EU rules, he said in a note, “ but one could argue it is not respecting the spirit of the rules.”

The brokers’ analysis has been strongly disputed by the Department of Finance.

A spokesman said that supplementary estimates were a regular feature each year and that what was new this year was that the Government was accounting for them in an up-front way before the budget, rather than passing them through the Oireachtas piecemeal late in the year.

There had been some €1.2 billion in supplementary estimates in 2014, the spokesman pointed out.

The estimates reflected spending pressures that had built up in key departments, he said, and in reality a lot of the money had already been spent. A significant part of the tax overrun was also being used to reduce the deficit this year, he said. The decision to push up spending this year will increase the deficit in 2015.The Government now expects a deficit of 2.1 per cent of GDP this year.

Target

Indications are that the 2016 target will be around 1.4 per cent of GDP. Davy had expected the deficit to fall to 1.7 per cent of GDP this year, before the supplementary estimates announcement.

It now believes it is likely to come in around 2 per cent, just below the Government’s new target.

According to Davy, “the new expenditure benchmark, intended to limit spending growth to 1.8 per cent in 2016, has had an inauspicious start, creating an incentive to bring forward spending into the final quarter of 2015. “

Goodbodys agree that the borrowing target for 2016 will be about 1.4 per cent of GDP. According to Mr O’Leary: “By ramping up spending in 2015 and not 2016, the Government, in a strict sense, is sticking to the rules, but one could argue is not respecting the spirit of the rules. There is an election to win after all.”