Challenges and choices for Noonan
A year ago Minister for Finance Michael Noonan based his 2014 Budget on a two per cent rate of growth in gross domestic product (GDP). Last week, and for the third time in a month, he raised his growth forecast for the economy – to 4.7 per cent. Publication of the exchequer tax and spending returns for September confirm the strength of the recovery. Although tax revenue was less buoyant than in August, as some receipts were delayed for technical reasons, the figures will bolster Mr Noonan’s confidence as he prepares the Budget for October 14th.
Tax revenues were, by the third quarter, well ahead of target and spending remains broadly under control. As the numbers out of work continue to fall, savings in welfare payments have offset spending overruns in the health budget. Unemployment, at 11.1 per cent, is now lower than the euro zone average – but still almost twice the UK rate. The extra tax revenue reflects greater economic activity as more people are at work and incomes have started to recover. The Minister has promised a neutral budget with no new austerity measures expected. An exception, however, is the water charge which householders will pay next year. The expectation is that the fiscal deficit for 2014 will be closer to 3.5 per cent of GDP – the Government’s revised forecast – than its original budget estimate of 4.8 per cent.
This leaves the Government well placed to meet its three per cent budget deficit target in 2015, as required under the terms of the troika bailout programme.
One question raised by the improvement in the public finances is whether the Government should accelerate the fiscal consolidation process. Should it be more ambitious in cutting the deficit further and lowering the level of public debt? This has exposed a clear division of opinion between economists and politicians. The Central Bank, Irish Fiscal Advisory Council (IFAC), European Commission, Economic and Social Research Institute – to name but some – have all recommended making a €2 billion fiscal adjustment. The Government has decided that after seven years of austerity, it is time to pause for breath, arguing that the three per cent fiscal deficit target can be met without a further €2 billion in tax rises and spending cuts.
Nevertheless the gap between revenue and spending remains huge – a €6 billion deficit by the third quarter. And as IFAC has pointed out, in pressing the case for the full €2 billion adjustment to be made, the overall level of debt is now five times higher than at the outset of the crisis. To ease the pace of fiscal adjustment too soon, as IFAC and others have argued, increases the risk that further austerity measures may be necessary in future. It is a debate the Oireachtas should have conducted before, and not after, Budget 2015.