THE PACKAGE of spending cuts and tax increases over each of the next four years should be larger than planned by the Government, according to the newly established Irish Fiscal Advisory Council.
Instead of a package of measures amounting to €3.6 billion in the December budget, the new public finances watchdog urged a package of €4.4 billion in its first assessment of the Government’s budgetary policy, published yesterday. In each of the subsequent years to 2015, the adjustment should be, on average, approximately €1 billion larger than planned, the report stated.
The council, which was set up in June, is charged with regularly assessing the quality of the Government’s economic and budgetary projections and assessing whether the fiscal stance is appropriate, given wider economic conditions.
The Government's existing plan, which was drawn up in April, is being revised and will be published by the end of the month in a four-year Pre-Budget Outlook. The council's recommendations increase the likelihood of larger adjustments and come just a week after the Central Bank urged the Coalition to go beyond the minimum €3.6 billion adjustment it must implement under the terms of the EU-International Monetary Fund bailout programme.
Speaking at the launch of the report, the chairman of the five-person council, Prof John McHale of NUI Galway, acknowledged the political difficulties for the Government of committing to specific tax and spend pledges in the Pre-Budget Outlook. But he said that giving households and businesses as much certainty as possible about future budget measures would aid recovery.
Although the council recognised the dampening effect on economic activity of austerity measures, it is firmly of the view that these are limited and that the longer-term gains of more rapid stabilisation of the public finances outweigh the small near-term growth-dampening effects. It did, however, acknowledge that there is some uncertainty about measuring accurately the growth-inhibiting effects of austerity measures.
Roughly half of the additional budgetary adjustments advocated by the council for 2012 will be needed just to meet the targets set down in the EU-IMF bailout programme. In 2012, the council believes a package of €4 billion will be needed to bring the budget deficit down to the targeted 8.6 per cent of gross domestic product. It advocates an additional €400 million adjustment.
Although the projections underpinning the Government’s medium-term plan were appropriate last April given economic conditions at the time, the council said that when positive and negative developments in the subsequent six-month period are taken into account, the overall outlook has deteriorated, necessitating larger adjustments just to meet the deficit targets.
Under the April plan, the Government was to reduce the budget deficit to 2.8 per cent of GDP by 2015. The council believes this is not ambitious enough, proposing a target of 1 per cent of GDP. This would provide greater leeway in the event of unexpected shocks and put the accumulated national debt on a more rapid downward trajectory, lessening the burden on taxpayers in the future.
On the composition of the adjustments, the council says the evidence internationally points to cuts in spending, rather than increases in taxes as the most effective means of stabilising public finances. Prof McHale added that many decisions on spending versus taxing were purely political choices on which the council would not take a view.
Minister for Finance Michael Noonan last night said there was strong advice a large adjustment would take too much demand out of the economy and the emerging recovery, but he conceded there were arguments for the position.
