ECONOMIC FORECASTING is at best an imperfect science and more often an unpredictable art as the Central Bank, by its latest downward revision of its growth estimates for the Irish economy, demonstrates. Three months ago the bank was predicting a modest economic recovery in 2012 before last week sharply adjusting its growth forecast. The British economist, John Maynard Keynes, when challenged to explain his change of position on an aspect of economic policy, replied: “When the facts change, I change my mind. What do you do, Sir?”
The Central Bank has done likewise – for the second time in six months – and lowered its growth forecast for 2012, from 1.8 per cent of GDP to 0.5 per cent. In doing so, the bank has cited evidence of a global slowdown and a deteriorating external economic environment as its main reasons. Export growth, on which the Irish economy greatly depends for recovery, has proved far weaker than anticipated, while domestic demand and consumer confidence remain depressed. Other economic forecasters have made similar downward adjustments to their growth projections.
Given that great economic uncertainty prevails – with recession in the euro area now possible in 2012 and the European sovereign debt crisis unresolved – economic forecasting could be dismissed as a largely futile exercise, when forecasts can be so quickly revised.
This now leaves the Government in a difficult position. It has based its budget arithmetic on a more optimistic set of growth assumptions than those favoured by the Central Bank and others. Nevertheless, the bank remains confident the Government can still achieve its target of a general government budget deficit of 8.6 per cent of GDP this year. And Taoiseach Enda Kenny has insisted the Government is on track to meet the fiscal goals set in the December budget.
Let us hope Mr Kenny’s confidence is not misplaced.
As yet, it is far too early in the financial year for the Government to consider making revenue or spending changes. Nevertheless, the deteriorating economic climate presents it with a formidable challenge in the months ahead. A lower growth rate in 2012 than the Government anticipated now seems likely, as weaker global demand depresses export growth and domestic demand contracts further. This will make it harder for the Government to meet its budget targets.
The Government may well take some encouragement from January’s exchequer returns, which showed a 17 per cent increase in tax revenues on January 2011. However, one month’s returns are rarely a reliable indicator. And the January receipts were boosted by late payment of corporation tax due in December and by other special factors. The Government cannot allow any slippage in the public finances that would jeopardise reaching the deficit target (8.6 per cent of GDP) set in the budget, a figure agreed with the EU-IMF troika.
Achieving it remains a precondition for receipt of the next tranche of funding in the €67.5 billion bailout agreement.