Framing the budget
FEW GOVERNMENTS have received more economic advice than the Fine Gael/Labour Coalition as it prepares for the December budget.
By the end of this month, the Government will publish its pre-budget outlook, setting the scale of fiscal adjustment in 2012 and later years, and deciding the overall balance between tax rises and spending cuts in achieving the required savings. Meanwhile representatives from the European Union and IMF are in Dublin to conduct their fourth review of the bailout programme.
The expert economic advice has come from many authoritative sources: from the Central Bank, in its recent quarterly report and from the ESRI; from the newly established Irish Fiscal Advisory Council and from the Organisation for Economic Co-operation and Development (OECD); and from many contributors at the annual Kenmare conference of the Dublin Economic Workshop this weekend. Almost all agree the Government must stick resolutely to the path of fiscal consolidation. That means meeting the budget deficit target set for 2012 and helping to ensure the goal of a 3 per cent general government deficit in 2015 remains a realistic target.
The Central Bank has recommended an aggressive approach to deficit reduction. In a world of great financial uncertainty, where global growth is weakening and the euro debt crisis continues unresolved, the bank is worried about the risk of negative shocks to the domestic economy. The OECD, likewise, favours a tough stance on fiscal adjustment suggesting that – where economic growth allows – the Government should cut the budget deficit faster than the EU-IMF programme requires. It says this should be done to help Ireland regain credibility in financial markets.
This relative uniformity of view among so many reputable institutions about the need to surpass market expectations by setting a lower than planned deficit target for 2012, has upset some in Government, with Ministers publicly staking out different positions in advance of detailed budget negotiations. Minister for Energy Pat Rabbitte has questioned the need for savings greater than the €3.6 billion agreed under the terms of the bail-out programme. Minister for Finance Michael Noonan has suggested that cuts of more than that amount may be needed to achieve the deficit target of 8.6 per cent of GDP. However, nearly two months from budget day, well before the financial out-turn for the current year can be predicted with certainty and some time before meaningful forecasts of tax revenue and the rate of growth in 2012 can be made with confidence, this public appearance of difference may be more apparent than real.
Any disagreement between Ministers on the €3.6 billion figure is offset by their collective acceptance of an 8.6 per cent target next year, which is a commitment under the EU and IMF programme. Unless the Government meets that expectation in delivering its first budget, the credibility of its medium term fiscal strategy will be damaged and an opportunity for Ireland to return to sovereign debt markets in 2013 will be lost.