Additional budgetary cuts may be needed this year, according to the Irish 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 targets are met.
The Government is committed under the terms of its EU-International Monetary Fund bailout to cuts its budget deficit to 8.6 per cent of gross domestic product in 2012, from 10 per cent last year.
Under its estimates, additional measures of €400 million may be needed this year to achieve the deficit target.
The IMF has stated that it did not believe additional measures should be taken this year 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, however, known for its fiscal hawkish stance and can be expected to take the same position as IFAC.
Over the next three budgets the council believes that the Government – under its current plans – is not doing enough to cuts 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 in October last year.
Rather than an adjustment of €3.5 billion in the next December’s budget, it advocates a package of €3.9 billion. Over the following two years, the council also advises the Government to aim for larger adjustments.
Cumulatively over the next three years, the council believes an adjustment of €11.4 billion is needed, compared to the current plan of the Government for €8.6 billion in spending cuts and new taxes.
The report is the second assessment of the Government’s economic and fiscal projections since IFAC was established last year. Many countries have set up such institutions as they have been found to improve the management of public finances.
The council, which comprises five academic economists, stated that although the Government’s forecasts for economic 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”
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 that there is an “unusually high degree of uncertainty surrounding Irish growth prospects”. In responding to this uncertainty the IFAC urged the Government to be more explicit in its discussion of risks to its forecasts and to formally outline other scenarios for growth beyond its central forecast.
It noted that if nominal GDP growth were to end up 1 per cent weaker per annum over the period 2012 to 2015 than envisaged in Budget 2012, the debt to GDP ratio would not stabilise by 2015 without additional discretionary measures. It went on to say that “in any event, debt levels will remain high over the medium-term and vulnerable to negative growth shocks”.
The council is chaired by Professor John McHale (Chair, and Head of Economics NUI Galway). the four other members are Sebastian Barnes (OECD), Professor Alan Barrett (TCD, on secondment from ESRI), Dr Donal Donovan (adjunct professor University of Limerick and formerly IMF staff) and Dr Róisín O’Sullivan (Associate Professor, Smith College, Massachusetts).
