Fiscal council says tough budget necessary

Coalition urged to stick with original €2bn plan to repair public finances

The Irish Fiscal Advisory Council, chaired by NUI Galway economist Prof John McHale, is an independent statutory body set up in the wake of the crash to monitor economic policy.  Photograph: Dara Mac Donaill

The Irish Fiscal Advisory Council, chaired by NUI Galway economist Prof John McHale, is an independent statutory body set up in the wake of the crash to monitor economic policy. Photograph: Dara Mac Donaill

 

The Irish Fiscal Advisory Council has urged the Government to proceed with another tough budget next month, saying considerable work is still required to repair the public finances.

Only days after Minister for Finance Michael Noonan said there would be no need for a new round of tax increases and spending cutbacks next year, the council says in a pre-budget report that the Government should still go ahead with its original plan to retrench by a further €2 billion.

Budget 2015 will be the first since Ireland exited the EU-IMF programme. By adopting a prudent budgetary stance, the Government can send a strong signal reinforcing its stated resolve to rectify the remaining weaknesses in the public finances,” it says.

The council, chaired by NUI Galway economist Prof John McHale, is an independent statutory body set up in the wake of the crash to monitor economic policy. One of its main functions is to assess and comment publicly on whether the Government is meeting its own stated budgetary targets and objectives.

The council never issued such a pre-budget statement in the past. Its intervention today reflects concern that fiscal discipline is being relaxed.

The statement follows official data which showed that Ireland’s economic growth has reached levels not seen since the “Celtic Tiger” boom.

Income tax

The Government plans to embark in Budget 2015 on the first phase of a three- or four-year plan to cut income tax but Ministers insist there will be no giveaway and they say resurgent growth will not be squandered . Both Mr Noonan and Minister for Public Expenditure Brendan Howlin have declared there will no return to boom and bust policies. However, the council says Ireland is entering a crucial period for breaking the pattern. Although the council notes that economic and fiscal developments have been significantly better than expected, it says a “premature easing” in fiscal adjustment would increase the risk of new measures being required in the future.

Public finances

“Fiscal policy must remain focused on the goal of repairing the public finances even in the face of short-term improvements in key indicators. This is required in order to underpin a return to sustainable medium-term economic growth,” says the statement.

 

“Government expenditure is likely to exceed revenue by around €7 billion in 2014. The overall level of debt is now five times higher than at the outset of the crisis and is 1.2 times the size of the economy. This highlights the continued vulnerability of the overall fiscal position.”

The council says the acceleration in growth and improving tax returns have substantially reduced uncertainty over the Government’s capacity to achieve a budget deficit below 3 per cent next year, as required under EU agreements.

“This is a welcome achievement and means that a full budget adjustment of €2 billion would most likely comfortably secure compliance with the 3 per cent ceiling in 2015.”

However, the council says compliance with official targets does not mean the overriding task of repairing the public finances has been accomplished. “The 3 per cent ceiling should be regarded as the maximum tolerable deficit level, not a prudent level.

“The fiscal council remains of the view that the most appropriate course of action is to implement the final instalment of the fiscal consolidation plan, and then to follow the less demanding requirements of the budgetary rule in later years.”