Watchdog unlikely to alter policy on austerity

THE CHAIRMAN of the Fiscal Advisory Council, the independent watchdog that oversees the Government’s management of the public finances, has suggested that its policy position is unlikely to change following the International Monetary Fund’s recent statement that it had underestimated the impact of austerity on bailout countries.

Speaking at the Dublin Economics Workshop in Galway yesterday, Prof John McHale said: “We certainly will be looking at the IMF findings . . . but the findings don’t seem to be particularly strong . . . in the Irish case . . .We will be looking at it and looking at it carefully, but at this point my sense would be that it mightn’t change our advice.”

Addressing delegates at the conference, Prof McHale said that market creditworthiness was the key measure of sustainability currently. Noting that Ireland’s debt-to-GDP ratio is expected to peak next year at just over 120 per cent based on Government projections, he said there was “very substantial uncertainty” around those projections, including uncertainty about bank debt. “There is a 40 per cent chance that GDP will fail to stabilise by 2015,”he said.

The Fiscal Advisory Council, which was set up last year, is mandated by legislation to make recommendations to the Government. Its establishment on a statutory basis was included in the memorandum of understanding between the Government and the troika of lenders.

In its most recent report published last month, it urged the Government to be more ambitious in tackling the budget deficit, calling for the introduction of €1.9 billion in cuts by 2015, in addition to those already provided for in the troika bailout programme.

Earlier at the workshop, which for the first time is taking place in Galway rather than Kenmare in Co Kerry, Eddie Casey of the Economic and Social Research Institute suggested that, in terms of Ireland’s fiscal consolidation strategy, there could be room for more cuts in current rather than capital expenditure. He said that while successful consolidation strategies are associated with primarily expenditure-based adjustments – with most successful programmes comprising two-thirds expenditure and one-third revenue measures - within the expenditure side there could be room for cuts to current spending, particularly in the area of Government wages. “There is a lot of judgment involved . . . [but] current expenditure would be one of the least damaging to growth,” he said. Mr Casey also noted that research had shown that devaluation was not a significant factor in determining the success of fiscal consolidation. “While the evidence in terms of highly open economies like Ireland’s is slightly more in favour, it is still far from convincing.”