ADDITIONAL BUDGETARY cuts may be needed this year, according to the Independent Fiscal Advisory Council (IFAC), the budgetary watchdog set up last year to provide analysis of the Government’s fiscal and economic projections. Although the council said it was too early to say whether this would be the case, it advocates additional measures, if needed, to ensure that targets are met.
The Government is committed under the terms of its EU-International Monetary Fund bailout to cuts the budget deficit to 8.6 per cent of gross domestic product in 2012, from 10 per cent last year.
IFAC estimates additional measures of €400 million may be needed to achieve the target.
The IMF has stated it does not believe additional measures should be taken if lower economic growth causes targets to be missed.
Neither of the other two members of the bailout troika – the European Commission and the European Central Bank – has taken a formal position on the issue. The ECB is known for its fiscal hawkish stance and can be expected to take a similar position to IFAC.
Over the next three budgets the council believes the Government – under current plans – is not doing enough to cut deficit and debt levels, and reiterates its call for a more ambitious plan in the period up to 2015, which it made in its first report last October.
Rather than an adjustment of €3.5 billion in next December’s budget it advocates a package of €3.9 billion. Cumulatively, over the next three years the council believes an adjustment of €11.4 billion is needed, compared to the current Government plan for €8.6 billion in cuts and new taxes.
The Council, which comprises five academic economists, stated the Government’s forecasts for growth in 2012 were “broadly appropriate” at the time the budget was drawn up. However, conditions have since deteriorated.
It said that “the latest economic data and more recent external growth projections suggest that the Department of Finance’s real GDP forecast for 2012 is now on the high side.”
Speaking at a briefing yesterday, chairman of the council, Professor John McHale, head of economics at NUI Galway, urged a vote in favour of the European fiscal compact treaty.
Adopting it, he said, would ensure Ireland had access to additional bailout funding should the need arise.
The council rejected assertions that austerity is not working, stating that “most international evidence, as well as simulations for the Irish economy, do not indicate that the current Irish adjustment path is self-defeating”.
It went on to note that there is “a growing body of international evidence that suggests that high debt levels undermine longer-run growth prospects” and that for this reason continued budgetary consolidation is necessary.
For the period from 2013-15, the report says there is an “unusually high degree of uncertainty surrounding Irish growth prospects”. In responding to this uncertainty IFAC urged the Government to be more explicit in outlining risks to its forecasts and to formally outline other scenarios for growth beyond its central forecast.
