Economic outlook: a time for caution

After years of retrenchment, the public finances are back close to balance

Photograph: Kai Pfaffenbach/Reuters

Photograph: Kai Pfaffenbach/Reuters

 

The latest economic forecasts from the Department of Finance are broadly upbeat, with an increase in the official prediction for the rate of economic growth and an expectation of a further strong rise in employment. The nature of Ireland’s economic data means that forecasts for GDP growth are tentative, but it is clear the recovery is now broadly based and has been surprisingly strong over the past few years.

The publication of the Stability Programme Update is designed to meet EU requirements for budgetary planning. The new information it contains in relation to the Government’s plans for October’s budget is limited. More detail will come when the Summer Economic Statement is published in June or July.

However, some important messages were sent out with the latest forecasts. The first is that spending commitments which have already been made, including investment under the new national programme and increases in public pay, will add €2.6 billion to spending next year.

After years of retrenchment, the public finances are back close to balance

This will eat into the €3.2 billion plus previously estimated to be available for new tax and spending measures in 2019, even if the two figures are not directly comparable. Exactly how the sums will work out will not be clear until the Summer Statement.

Minister for Finance Paschal Donohoe is promising to be prudent, not spending all the resources available under EU rules and also starting a rainy day fund in 2019. This approach is being backed, it seems, by Fianna Fáil, whose finance spokesman, Michael McGrath, warned about the risks ahead from Brexit and other factors. These statements are welcome, though it remains to be seen how they survive the political pressures in the run up to the Budget. Risks from Brexit in particular are unpredictable.

After years of retrenchment, the public finances are back close to balance. This brings new priorities. One, in the light of the uncertainty we face, is to eliminate annual borrowing and stop adding to our debt. The second is to ensure value for money and proper management, particularly of major spending programmes.

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