Fiscal chief warns against impact of giveaway politics on economy

Ireland is at risk of repeating the budgetary errors of the past, the chairman of the Irish Fiscal Advisory Council has warned.

“Politics may again be leading us to the kind of mistakes we’ve made in the past,” Professor John McHale said, pointing to the “pressure” for tax cuts and spending increases that was building on politicians.

“Politics can pull government in a different direction to what economists think is appropriate fiscal policy,” he said.

Professor McHale said that the Government “missed an opportunity to very decisively move the budgetary situation into a zone of safety” by not sticking with its original plan for €2 billion in tax increases and spending cuts in Budget 2015. He said that as a result Ireland’s debt levels will be roughly €10 billion higher in 2018 than if it had stuck with this strategy, instead of introducing a budget which increased borrowing by €1 billion.

While Ireland is “continuing to make progress”, and the Government will likely accomplish the “important milestone” of reducing the deficit to below the 3 per cent ceiling in 2015, there are challenges ahead, not least that posed by the uncertainty surrounding economic growth. If growth comes in below forecast, the budget figures could quickly be thrown off course, the council report warns.

“It’s fair to say that the most difficult phase is over,” Prof McHale said, but he noted that a “slower pace of adjustment” may still be to come. “We’re still far from the land of plenty, and it’s still pretty tough.”

He bemoaned the absence of “a well-specified plan for the public finances beyond 2015” in the most recent budget, noting that published tax revenue forecasts in the budget “assume no change in policy despite budget commitments to lower taxes in the coming years”.

In addition, he warned that, despite expenditure ceilings being raised, the Government’s budget spending plan out to 2017 does not “adequately address” these higher levels of spending, or explain how pressures emerging in various departments such as health will be dealt with.

“Credible medium-term plans for the public finances are an important part of the framework and are crucial to avoiding the mistakes of the past.”

Prof McHale was speaking at the publication of the seventh quarterly report from the council, which advises the Government on economic policy.