Government must not row back on planned cuts and taxes, watchdog urges

The Government should not reduce the size of the packages of spending cuts and tax increases scheduled for the next two budgets, according to the Irish Fiscal Advisory Council, the independent watchdog charged with ensuring better management of the public finances.

Some Government figures have suggested that the savings achieved from the February deal on the promissory notes could allow a stretching out of the budget adjustment over a longer period.

However, the chair of the watchdog, Prof John McHale of NUI Galway, said: "The council's assessment is that the planned adjustments of €3.1 billion in 2014 and €2 billion in 2015 should not be reduced."

The council judges that there is a one-in-three chance that the Government will not reach its budget deficit target by 2015 and believes that easing the pace of consolidation would push that already elevated risk even higher.

Echoing recent reports by the European Commission and the IMF, Prof McHale also stressed that significant uncertainties remain for the Irish economy, particularly around the prospects for growth and the capacity to meet challenging expenditure reduction targets in health.

At the launch of the report yesterday, Prof McHale said it might be easier to avoid a second bailout if there was clarity on a “precautionary” credit line available after the scheduled exit from the current programme in December. Although seemingly paradoxical, investors are likely to be more confident in buying and holding Irish Government debt if they know a second bailout is available (rather than resorting to writing down some of the debt, as happened in Greece).

More positively, the margin of safety in budget targets suggested by the council in its previous report had been “broadly achieved”. As such, the council has not repeated previous calls for additional budgetary tightening beyond current plans.

Beneficial carryover
"Based on the better than expected Exchequer out-turn and higher than forecast level of nominal GDP in 2012, it now appears likely that the 2012 general Government deficit will be significantly below 8 per cent of GDP, which compares with a budget-day estimate of 8.2 per cent of GDP. This should have some beneficial carry-over effects for future years," the council said.

It went on to say that “in addition, the promissory note transaction has reduced the projected 2015 deficit by 0.6 per cent of GDP”.

The council’s new projections put the general Government deficit in 2015 at 2 per cent of GDP. This is below the Government’s forecast of 2.9 per cent.

Precautionary funding
A return to "State creditworthiness" would be helped if the Government secured precautionary funding arrangements for the period after the EU-IMF bailout ends (in December 2013) and if extensions to the maturities on European bailout loans were to be achieved, the council said.

Commenting on the tendency among economists to be overly optimistic about recovery, the council noted that “forecasters appear to have underestimated the severity of the ‘balance sheet recession’ that followed the bursting of Ireland’s property/credit bubble”.

Along with Prof McHale, the four other council members are: Sebastian Barnes, Organisation for Economic Co-operation & Development; Prof Alan Barrett, Economic & Social Research Institute; Dr Donal Donovan, University of Limerick (formerly International Monetary Fund staff); and Dr Róisín O'Sullivan, associate professor, Smith College, Massachusetts.