S&P warns it may downgrade Ireland’s credit rating

Agency highlights risks from increased tax competition and pressure on public spending

Minister for Finance Paschal Donohoe. The Government ran a small budget surplus last year for the first time in more than a decade thanks largely to record corporation tax receipts. Photograph: Dara Mac Donaill

Minister for Finance Paschal Donohoe. The Government ran a small budget surplus last year for the first time in more than a decade thanks largely to record corporation tax receipts. Photograph: Dara Mac Donaill

 

Standard and Poor’s (S&P) has warned that it may reduce Ireland’s credit rating if the Government’s budgetary position deteriorates as a result of increased tax competition internationally or from greater pressure on public spending.

The warning was contained in the agency’s latest outlook report for euro-zone sovereign ratings.

S&P currently applies a stable A+/A-1 rating to Ireland, balancing what it said was the Government’s continuing budgetary consolidation against downside risks associated with external factors, “including the potential exposure of the Irish economy to Brexit aftershocks”.

It said it could raise this rating further if Government debt, which currently stands at more than €200 billion, were to decline in absolute terms on foot of further budgetary surpluses.

The Government ran a small budget surplus last year for the first time in more than a decade thanks largely to record corporation tax receipts.

In its report, the agency warned it could equally downgrade Ireland’s rating.

“We could lower the ratings if, contrary to our current expectations, Ireland’s external or budgetary positions deteriorate, for example, due to more pronounced international tax competition or increasing pressure on public spending,” it said.

The Irish Fiscal Advisory Council criticised the Government’s budgetary stance last month, suggesting the large corporate tax buffer was covering up for loose Government spending.

S&P forecast the Irish economy would expand by 3.8 per cent in gross-domestic-product terms this year, down from six per cent last year. This is lower than the Government’s forecast of 4.1 per cent.

In its report, the agency noted that the euro zone’s macroeconomic fundamentals strengthened in 2018, thanks to steady economic growth and improved fiscal outcomes, particularly during the first half of the year, resulting in higher ratings for several states.

“The big question for 2019 is whether steady growth and budgetary consolidation will continue, and whether politically pressured governments can deliver on structural reforms, including to labour markets,” it said.

It also highlighted that an easing of European Central Bank quantitative easing could place further pressure on governments’ funding costs.

“Alongside weaker growth, for example, in the event of a slowing US economy, or a rise in protectionism, this could make 2019 a more challenging year for European sovereigns,” it said.