Economy is not yet overheating, says fiscal advisory body

Government urged to avoid unnecessary spending in this year’s budget

Ireland’s debt burden is still among the highest in the OECD, says the Irish Fiscal Advisory Council

Ireland’s debt burden is still among the highest in the OECD, says the Irish Fiscal Advisory Council

 

The Irish economy is not yet overheating, but the Government should avoid unnecessary spending in this year’s budget, an independent advisory body said on Tuesday.

It went on to say that any unexpected increase in tax revenues should be used to bolster the country’s reserves and pay down debt.

The Irish Fiscal Advisory Council (IFAC), set up to advise the Government on budget policy, has warned that there is “no case for additional fiscal stimulus” in 2019, as it said the Government should “at least” stick to its plans for 2019 and anything more expansionary is not likely to be appropriate.

“There is no case for additional fiscal stimulus in 2019 beyond existing plans as set out in Stability Programme Update 2018,” the council said in its report.

This would limit the scope for spending increases or tax cuts up to about €3.5 billion (the “gross fiscal space” in Budget 2019, IFAC said, adding that if there had been less “spending drift” over the past number of years, the country’s public finances would now be in a better position).

Following the OECD’s warning last month that signs of overheating have begun to emerge in the Irish economy, chairman Séamus Coffey downplayed such concerns, noting that while talk of overheating “isn’t misplaced”, it “isn’t happening at the moment”.

“At present overheating pressures seem muted but this can change rapidly in the Irish economy,” he said, adding that the Government needs to keep its eye on the potential for the economy to heat up too much, and in this respect, needs to consider “offset” measures that could be introduced if needed to dampen down the economy.

This would involve keeping spending in line with the medium-term potential of the economy, based on economic growth of 3-3.5 per cent a year, Mr Coffey suggested.

On housing, the council again warned that faster than assumed growth in housing output “although needed”, could prompt overheating pressures. And if construction tax revenues do ramp up, the funds should be used to build buffers either through additional “rainy day” fund contributions, or through faster debt reduction, Mr Coffey said.

Budget 2019

Noting that some €2.5 billion has already been allocated for spending next year, Mr Coffey said that the scope for new initiatives in Budget 2019 will be “limited”. However, he added that there may be scope for a broader budgetary package if, as happened last year, the Government opts to also introduce revenue raising measures to pay for increased spending/tax cuts, although he warned against too much exuberance.

“Unexpected increases in tax revenues or lower interest costs should not be used to fund further budgetary measures,” the report said, adding that it would be “desirable” for the Government to improve the budget balance by more than planned.

Risks

This comes against a background of growing concerns, with Brexit, international tax policy and US trade policy just some of the risks facing Ireland in the years ahead.

The report also outlined how Ireland is vulnerable to the exit of a large foreign-owned multinational firm, given the high concentration of payments among the top 10 contributing firms.

Moreover, IFAC said that Ireland’s debt burden is still among the highest in the OECD; when the gross national income figure for national income is used instead of gross domestic product, Ireland’s net debt is equivalent to 87 per cent, the sixth highest in the OECD behind only Italy, Portugal, Belgium, France and Japan.