Spring statement assumes Ireland’s economy will continue to grow

The spring statement assumes Ireland’s economy will expand this year by 4 per cent and continue growing at an annual rate above or about 3 per cent until 2020. The continuation of such economic growth is the foundation stone on which the plan is built. So how realistic are the forecasts?

The key projections here are for this year and next, as the 2015 performance and the outturn anticipated for 2016 will determine the availability of funds for the October budget. This is crucial from the perspective of the Coalition, which has promised a tax cut of at least €600 million ahead of the election and the same amount in a spending increase. Moreover, the next budget would be the first of another five expansionary budgets if the plan sticks.

Although the assumed rate of GDP growth in 2015 is down from 4.8 per cent in 2014, it would still be the highest in Europe. The crucial driver here is the continued increase in domestic demand as consumers spend more and businesses invest more. This is on top of continued strength in the export sector, itself a beneficiary of recovery in the American and British economies and potential beneficiary of the long-awaited recovery in the wider European economy.

The 4 per cent forecast for 2015, up from the 3.9 per cent projection on budget day last autumn is a little ahead of the expectations set out by the OECD, the European Commission, the International Monetary Fund and the Central Bank. Among public bodies, only the Economic and Social Research Institute is forecasting higher growth than the Government. The ESRI believes the economy will expand 4.4 per cent.

Although international bodies tend to be conservative in their assessments, the fact remains that the Government has deeper insight into the real-time flow of data on national finances and other key indicators. The hunch remains that Noonan’s latest growth forecast probably understates the position. After all, pay talks loom with public secotr unions and there are many other claims on the funds available to raise expenditure. A bigger uplift in the growth forecast would only encourage the political clamour for recovery dividends.

After all, business lobby Ibec has forecast 5.5 per cent growth this year. Ibec forecasts are rarely in the conservative realm. But the argument is made in Government circles that the group’s projections do not take account of the fact that the expansion in Irish economic activity also increases imports into the State, thereby constraining the actual growth rate.

Still, the fact remains that tax revenue this year is set to come in €1 billion ahead of budget-day expectations. While public expenditure will be some €250 million higher than set out , tax buoyancy will still reduce the deficit.

Last autumn, the Government forecast a deficit this year of 2.7 per cent of GDP. While this has now been reduced to 2.3 per cent, that’s not the full story. Pending a formal decision by European statisticians, the 2.3 per cent figure assumes the liabilities of Irish Water will be held on the balance sheet of the State.

The Government is campaigning for such liabilities to off balance sheet. There is no certainty as of yet on that front, and some figures in Government circles believe this is but a 50:50 prospect. If Irish Water goes off balance sheet, then the deficit forecast for 2015 would go down to 2 per cent. In line with figures set out in the statement, such a decision would bring the State a step closer to a balanced budget in 2017 and a surplus would be achieved in 2018.

Other positive trends are in train this year, not least the euro’s weakness and the low oil price. Thanks to early IMF repayments on super-low borrowing cost on the open market, interest costs on the national debt will this year be lower than anticipated. The interest burden this year will fall to an estimated 10 per cent of general government revenue from 13 per cent in 2013.

Moreover, the Government expects to receive a €500 million increase this year in the surplus forecast from the Central Bank. A good deal of this sum cannot be included as a revenue as it is attributable to capital gains realised on the bank’s early sell-off of Irish sovereign bonds it holds as a result of the deal to scrap Anglo Irish Bank promissory notes.

That there are risks to the outlook is not in doubt. The fate of Greece is uncertain. In addition, a bubble may be developing in international financial markets. Although the risk of deflation in the euro zone has receded, the plans says an increase of one percentage point in the ECB’s main interest rate would cut the size of Ireland’s GDP by an appreciable amount. That’s not going to happen this year or next but Department of Finance figures say such a rise in any of the years between 2017 and 2020 would result in a once-off drop in GDP of between 2.1 per cent and 2.4 per cent.