Finance watchdog warns budget plan close to ‘prudent’ limit

The State’s fiscal watchdog has warned that the Government’s planned budgetary adjustment this year will end up being substantially larger than the €1 billion previously flagged.

In a pre-budget statement, the Irish Fiscal Advisory Council (Ifac) claimed that when added to new spending commitments in health and education, the total package of measures earmarked for Budget 2017 would, in fact, amount to a €2.4 billion adjustment.

Hence, the Government's fiscal stance was considerably more expansionary than signalled in its recent Summer Economic Statement, the council said.

However, it stopped short of openly criticising the Government’s plan, noting that the measures were still within the limits of what it regarded as prudent.

“The council assesses that the resulting fiscal stance is at the limit of the range of prudent policies when the risks facing the economy and the high level of debt are considered,” it said, while warning a further loosening of the fiscal stance would not be appropriate.

In its latest statement, Ifac urged the Government to take advantage of the current strong growth in tax revenue to eliminate the remaining budget deficit and accelerate the reduction in the State’s debt ratio.

Heavily distorted

It also weighed into the debate over Ireland’s headline growth metrics, noting they were being heavily distorted by the activities of a small number of multinational enterprises.

Based on underlying measures of economic activity, the council said the economy was growing at a “reasonably solid rate” but nothing like the 26 per cent contained in the revised estimates for 2015.

It also cautioned that the State’s headline debt-to-GDP (gross domestic product) ratio, which fell to less than 80 per cent as a result of the recent revisions, significantly underestimated the size of the State’s debt burden.

“Reducing the debt to safer levels must remain a priority to protect the public finances against numerous risks, one of which has already materialised in the form of the UK’s vote to leave the EU,” the council said.

Echoing comments by Central Bank governor Philip Lane earlier in the week, the council cautioned the Government not to base further spending on the current spike in corporation tax receipts.

“ A further easing of the fiscal stance based on an assumed continuation of these revenues would not be appropriate,” it said.

Impact of Brexit

The council, which is chaired by Prof John McHale, said the impact of Brexit was still largely unknown, although the risks and uncertainty facing the Irish economy have increased.

In the most benign scenario, the council said it expected Irish economic growth to be reduced by around ¾ of a percentage point in 2017, as a result of the UK’s move to exit the EU.

However, it warned the eventual impact of Brexit could turn out to be more serious, resulting in a long-lasting reduction in the growth rate.

A more severe Brexit scenario could see fiscal space reduced by around a quarter compared to the current Summer Economic Statement estimates, which suggest the available "fiscal space" for the next five years would be about €11.3 billion.

At the time of the vote, Minister for Finance Michael Noonan suggested the likely drag on Irish GDP from Brexit might be 1.2 per cent over two years.