Safeguarding the recovery

OECD gives coalition qualified endorsement on its budget strategy

The Government last April set out the broad outline of the 2016 budget in its spring economic statement, promising expansionary measures, while setting a limit of €1.5 billion on the size of the tax and spending package. Since then, despite stronger economic growth, buoyant tax revenue – and mounting pressure by Ministers and backbenchers for more leeway on spending – the Government has, commendably, resisted the rising chorus of demands to change course. Taoiseach Enda Kenny has ruled out increasing the budget package, and bluntly told his Ministers: “We are not going to blow the recovery.”

For a Government, at most months away from a general election, to say and do otherwise would at this stage be political folly, and economic madness. Such a move would greatly weaken the Government's credibility, and devalue its economic achievements in office since 2011. At home, it would be accused of auction politics, of putting party before country, and of jeopardising the economic recovery. While abroad, the capital markets – on which Ireland relies to finance its borrowing needs, and where two thirds of the State's sovereign debt is held in foreign hands – would be unimpressed by such a cynical U-turn. The Government, by holding its collective nerve in managing the economy since 2011, has won international recognition, and much praise for that achievement.

On Tuesday, the Organisation for Economic Co-operation and Development (OECD) in its biennial review of the Irish economy, gave the Government a qualified seal of approval for its economic management efforts. The review noted that "unemployment is falling steadily, the budget deficit is declining, public debt has peaked and continues to fall and international credibility has been strengthened". The OECD forecasts that Ireland will grow by 5 per cent of GDP in 2015, and 4 per cent in 2016: that is over three times faster than the euro area average this year, and twice as fast next year. OECD secretary general Angel Gurria broadly endorsed the Government's fiscal approach, describing the Government's aim to bring the budget deficit to between 1 and 2 per cent of GDP in 2016, as a "prudently expansionary". A view largely accepted by the Irish Fiscal Advisory Council in its pre-budget statement issued today.

Nevertheless, Mr Gurria, while acknowledging Ireland’s success in achieving fiscal consolidation – 17 per cent of GDP between 2008 and 2014 – also noted that the country’s high sovereign debt level (some 100 per cent of GDP) has left it exposed to a future rise in interest rates. A one percentage point rise in rates would increase debt servicing costs by 1 per cent of GDP. The urgent need to reduce the debt/GDP ratio, without impeding economic recovery, could not be clearer.