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Analysis/Comment Last Updated: Nov 25, 2013 - 9:16 AM


Ireland's toothless fiscal watchdog threatens to bark
By Michael Hennigan, Finfacts founder and editor
Nov 22, 2013 - 7:22 AM

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The Irish Fiscal Advisory Council was established in 2011 at the request of the bailout troika and as an independent fiscal watchdog it was designed to be toothless by the Department of Finance. This week following two years of being treated as an intellectual ornament, it has threatened to bark in future and create political costs if its views continue to be ignored.

On Thursday in its latest fiscal assessment following last month's Budget, the council says that "overall, the Government’s planned fiscal stance is assessed to be conducive to 'prudent economic and budgetary management.'”

However, because the 2014 planned fiscal adjustment was cut from €3.1bn to €2.5bn following pressure by the Labour Party, the council says that the chances of the State not reaching meeting its commitments had increased from 33% to 50%.

The assessment report suggests that the Department of Finance used a sleight of hand when it presented one-off savings of €0.6bn mainly arising from the restructuring of Anglo Irish Bank promissory notes as part of the consolidation adjustment.   

With interest expenditures set to rise further in 2014 and with investment spending at such low levels, there are fewer buffers in place to safeguard against slippages.

The Department forecasts GDP (gross domestic product) growth of 2% in 2014.

The impact of the so-called 'patent cliff' on pharmaceutical exports is expected to restrain merchandise exports growth in 2014 but the council sees services exports as a counterbalance:

In contrast, services exports (which now account for around half of total exports) are expected to remain robust. Over the forecast horizon, total exports should benefit from a strengthening in demand in Ireland’s major trading partners, domestic competitiveness improvements and the resilience of the services sector."

The resilience is  an illusion.

Growth is services has been led by tax-related diversions of global revenues by the likes of Google (41% of global revenues in 2012) and Microsoft (24% of global revenues in 2011/12).

These accounting transaction become fake Irish output and exports and also falsely add to GDP. See more here -- the council will lack credibility until it recognises this reality and hopefully before new international tax rules wipe out almost half of Irish services exports. 

The council says that "given a fragile international financial environment," it would have supported an application for a precautionary credit line on exiting the bailout.

Prof McHale, council chairman, told reporters in Dublin on Thursday that the council was forced to contact the Government recently to ask ministers to stop ignoring its advice.

Asked if he felt the council could replace the oversight role of the departed bailout troika from next year, he said: “Whether we can have the level of influence the troika [EU, IMF and European Central Bank] had only time will tell . . . but we can raise the political costs by making recommendations in a public manner.”

We have said in the recent past that the Irish Fiscal Advisory Council has a restricted mandate from the folk at the Department of Finance who went with the flow during the bubble.

It would of course have been a shock for example if it had been given a role in assessment of party economic proposals at general election time or if it was to report to the Dáil rather than the finance minister.

Australia’s new fiscal council, the Parliamentary Budget Office, reports to parliament, and ‘The Australian’ said last September on its role in costing economic proposals in the then general election campaign: “The PBO is transforming the politics of election costing but it is taking time for both sides to get used to the new rules of the game.”

In Canada, Kevin Page, the first Parliamentary Budget Officer, who completed his 5-year term last March, had been in a running battle with Jim Flaherty, finance minister, but Page stood his ground.

The Globe and Mail reported that Page went to court late last year after most federal departments balked at handing over details about the spending and staffing cuts announced in the budget. In a report last January, the PBO said spending restraint so far was hitting front-line services while back-office spending continued to rise – exactly the opposite of what Flaherty promised.

If the IFAC interprets its mandate as being restricted to just providing views on macroeconomic forecasts, it is hard to envisage it being taken seriously overtime by the DoF and the public via the media.

That would be the result of a conservative interpretation of the mandate.

However, it is mandated: “To assess whether the fiscal stance of the Government is conducive to prudent economic and budgetary management…”

This is the opening for iconoclasts, if any, to drill down into the detail.

Enterprise/ science spending is likely not the only no-go area in the budget.

It would be a start to push for modern accounting systems in government:
Last July the IMF said in a report, "there is no uniform set of accounting rule and procedures applying to government departments, extra-budgetary funds, semi-state bodies, local governments, and public corporations. 'This makes consolidating government-wide financial information and promoting system-wide improvements in financial reporting practices very costly and time consuming.'"

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