Views of fiscal body not binding, says Kenny

TAOISEACH ENDA Kenny has said the Government is not bound by the advice of the Fiscal Advisory Council to impose €1.9 billion in cuts between now and 2015, in addition to those already provided for in the troika bailout programme.

The council yesterday urged the Government to be more ambitious in tackling the budget deficit over the next three years. The new independent watchdog is tasked with overseeing the management of the public finances.

The Taoiseach gave a firm indication yesterday that the Government would not follow the key recommendation of the fiscal council report. “It is not binding on Government but the Government can reflect on any issues that are appropriate,” said Mr Kenny.

Speaking at an event at the Four Seasons Hotel in Dublin, the Taoiseach said the Government’s medium-term economic programme had won the support of the troika. The comments were seen as making it unlikely the Government will incorporate that recommendation of the fiscal council into its budget arithmetic over the next three years.

The budget for 2013, to be announced on December 5th, will require the Government to find a total of €3.5 billion in cuts and new revenue streams. The Taoiseach told Fine Gael colleagues earlier this week that the three months in the lead-up to the budget would be the Coalition’s most difficult period in office.

Mr Kenny referred to the National Treasury Management Agency’s foray into markets yesterday as a sign of increased confidence in the Government’s economic strategy. The NTMA sold €500 million of treasury bills with a three-month maturity at a yield of 0.7 per cent, a substantial improvement on the 1.8 per cent yield it obtained in July.

In the third report since its establishment last year, the fiscal council urged the Government to add a further €1.9 billion in adjustments to the planned €8.6 billion over the 2013-15 period.

The council believes the additional cuts and tax increases should be introduced in the last two years of this period rather than in the forthcoming budget.

It believes the €3.5 billion package of measures for next year is appropriate, but that similar-sized adjustments are required in both subsequent years.

Currently, the Government plans a savings and new taxes package of €3.1 billion in budget 2014 and €2 billion in budget 2015.

The independent council of five academic economists, which is mandated by legislation to make such recommendations, believes the additional measures will “help to put the debt to GDP ratio on a faster downward trajectory and would provide additional insurance, albeit limited, in the effort to ensure debt sustainability”.

Its chairman, Prof John McHale from NUI Galway, likened the strategy to an insurance policy in the event of the Government undershooting its medium-term fiscal targets.

In an implicit criticism of the Government’s ruling out of a range of budgetary options, the council “urges that all adjustment margins be kept under close review, including tax rates, public-sector pay/pensions, and welfare rates”. This echoes recent hints by the International Monetary Fund about the fire-walling of some tax rates and spending areas.

The establishment of the fiscal council on a statutory basis was included in the memorandum of understanding between the Government and the troika of lenders.

In an earlier report this year, the council suggested the Government should work toward a lower 1.7 per cent deficit by 2015 compared with the current target of 3 per cent. That advice has not been taken on board.