End of austerity budgets may be as early as 2015

The Irish Fiscal Advisory Council believes the long line of major austerity budgets will come an end in 2015 or 2016, with the possibility opening up by 2017 or 2018 of an expansion in public expenditure.

Setting out risks to the recovery scenario, council chairman Prof John McHale said the difficult phase of fiscal adjustment should be complete by 2015 or the following year.

“By 2017, 2018, we should be in a position to actually raise expenditure as well. Choice would have to be made [as to] how to take those gains,” he told reporters.

Warning, however, that lower growth generally and a prolonged balance sheet recession still posed a danger, he said it could not discounted the period of very disappointing growth would continue for longer than thought.

“Based on the best guesses at the moment, the difficult phase should be over after 2015, against possibly 2016. 2016 could be a neutral year. That would be our best guess.”

Prof McHale was speaking as the council published its Fiscal Assessment Report, which said very significant risks remain. “It’s important that that progress that we have noted in achieving sustainability is reinforced,” he said.

Debt reduction
"It's important to continue with deficit and debt reduction, with the credibility of that fiscal stance underpinned by compliance with the fiscal rules. The new medium-term economic plan provides an opportunity to lay out the next phase of the fiscal strategy."

Noting the Department of Finance projects that real gross domestic product growth will rise next year to 2 per cent from 0.2 per cent in 2013, the council said growth this year is being depressed by a number of factors. "These include a background of ongoing balance sheet repair, budgetary consolidation and weak demand in Ireland's main trading partners. The pharmaceuticals 'patent cliff' is also reducing the growth of net exports. Uncertainties relating to these elements mean that risks to the forecasts are tilted to the downside for 2014."

Prof McHale said the council took issue with the department over public confusion created on the size of the retrenchment in Budget 2014.

He noted the Government took the benefit of €600 million in “additional resources and savings” to cite a total retrenchment of €3.1 billion in some quarters. However, these were “just savings” and did not constitute permanent budget consolidation effort.

Adjustment ambiguity
Based on "standard measures", the council said the actual adjustment was €2.5 billion as set out by Minister for Finance Michael Noonan on budget day. "It was unfortunate that that confusion was allowed to exist ," said Prof McHale. "We do chide the Department of Finance for allowing that confusion to exist and call for a much clearer statement on the actual size of the budgetary adjustment in future budgets."

Calling for self-protection against loss of market access in the post-bailout period, he emphasised the value of good debt-maturity management and holdings of cash reserves.

“We did publicly give our advice that we thought, at least from an economics perspective, that a precautionary credit line would have been a valuable additional layer of protection complementing the cash management and debt-maturity management policies . . .

“I think you wouldn’t want to exaggerate the benefits of a precautionary credit line in reducing risk, but it does give just one further layer of protection that we keep our borrowing costs low. But . . . European politics was also at play and clearly there was uncertainty as to what would happen after an application had been made and the Government decisions.” Had the Government taken a reasonable decision? “I would say yes it probably was a reasonable decision . . . But again, we haven’t changed our view that . . . for a precautionary credit line the benefits would have outweighed the costs .”