Fiscal council advice 'a budget factor'


Advice from the Fiscal Advisory Council would be one of the factors taken into account in determining the scale of the required budgetary adjustment, Minister for Public Expenditure and Reform Brendan Howlin said today.

The council has recommended €4 billion in cuts and new taxes.

Mr Howlin told the Dáil the Government had established the council to give independent advice and that was what it had done. The Government, he added, had committed itself to reducing the deficit to 8.6 per cent of GDP next year.

"The exact quantum of the adjustment to get there is a matter that is currently being determined," said Mr Howlin.

The Minister was replying to Fianna Fáil deputy leader Éamon Ó Cuív who asked if the Government would accept or reject the council’s advice.

A harsher than expected budget is in prospect in December after Minister for Finance Michael Noonan last night confirmed an adjustment of about €4 billion instead of the €3.6 billion planned.

He was commenting on a report from the newly established Fiscal Advisory Council, which said €4 billion in cuts and new taxes would be required to meet the target of reducing the deficit to 8.6 per cent of gross domestic product (GDP) next year.

The council, established in June under the terms of the bailout, is an independent public finances watchdog charged with regularly assessing the quality of the Government’s economic and budgetary projections and whether the overall fiscal stance is appropriate.

It also recommended a further €400 million in cuts on top of that so that the budget would exceed the existing target and put the economy on a long-term recovery course. “We are going to meet the 8.6 per cent of GDP target even it takes more than €3.6 billion to do so,” Mr Noonan said last night.

The 8.6 per cent target is a requirement under the bailout agreed with the International Monetary Fund, the European Commission and the European Central Bank.

He said the Fiscal Advisory Council’s advice could be divided into two. One was the view that it would take more than €3.6 billion in savings to meet the target, and he accepted that. On the second part – that he should make a further €400 million in savings to bring the total to €4.4 billion – the Minister said this was a matter of judgment and there was conflicting advice.

Although the council recognised the dampening effect on economic activity of austerity measures, it firmly believes 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 some uncertainty about measuring accurately the growth-inhibiting effects of austerity measures.

Mr Noonan said there was strong advice that such a large adjustment would take too much demand out of the economy and the emerging economic recovery, but he conceded there were arguments for the council’s position. He said he would not need to make a decision on the issue for at least another three weeks.

Mr Noonan was adamant that relaxing the budgetary targets agreed in the programme with the EU-IMF was not a viable option as the State needed to safeguard its hard-won gains and the constraints imposed by both the market and official creditors.

The council’s proposal for budget cuts of €4 billion echo recent recommendations from both the Central Bank and the Economic and Social Research Institute. In its most recent Quarterly Economic Commentary, the institute urged the Government to cut its deficit more rapidly than planned, starting with a budget adjustment in 2012 of up to €4 billion. The Central Bank, in its quarterly update, repeated its view there were advantages to implementing a budget adjustment of more than €3.6 billion.

The council also proposed more severe targets for budgetary savings over subsequent years in the interests of a long-term recovery.

It has called for the Government to cut its budget deficit to 1 per cent of GDP by 2015 from a current target of 2.8 per cent.

To do that, it suggests a budget adjustment of €3.9 billion in 2013 against a current target of €3.1 billion, similar cuts in 2014 and savings of €3.7 billion in 2015 compared to the plan for a €2 billion adjustment in that year.

Meanwhile, president of the European Commission José Manuel Barroso called for the euro zone’s rescue fund to be given greater powers to stop economic contagion.

He also said Europe’s leaders should stop prevaricating and move quickly to bail out Greece.