Ireland: While headline data is expected to show that the Irish economy will post the strongest growth in the Eurozone this year, the Irish Fiscal Council today warns of dodgy official forecasts beyond 2016 and the Government's lack of a credible fiscal plan. On Wednesday, the Organisation for Economic Co-operation and Development (OECD) warned that the jump in residential and office property market prices are "reminiscent of the bubble period of a decade ago."
In its latest fiscal assessment, the Irish Fiscal Advisory Council (IFAC), which has no direct power but was established in 2011 at the request of the bailout troika to assess Department of Finance budgetary and related economic plans, acknowledges that the budget deficit target this year will be below the 3% official European Commission limit in 2015. However, it queries the credibility of forecasts that have been made to 2018 and which were announced last month in what was termed a Spring Economic Statement (SES).
The Government "is not fully compliant with the rules [EU fiscal rules] and as we look further there isn't really a plan at all," Prof John McHale, the IFAC chairman, said.
“The forecasts for government spending...do not present a full picture of the likely costs of demographic aging and cost pressures in delivering existing public services,” the fiscal assessment says. “Published tax revenue forecasts do not take into account government commitments to reduce taxes. Given these shortcomings, the deficit projections...do not provide a useful picture of the fiscal position after 2016.”
The Council also suggests that the Department of Finance economists are either incompetent or doing the bidding of their political superiors. After the bubble had bust in 2009, the late Garret FitzGerald, former taoiseach, had called on the Department to hire a team of economists to ensure that credible data was available to policy makers — and maybe it was in this case but was binned?
It says in respect of the Stability Programme Update (SPU) 2015 which is a report required by the European Commission annually, that the current report's "forecasts indicate that the fall in the structural budget deficit in the Government’s plan falls short of the requirements of the European Commission's Budgetary Rule in 2016 on a forward-looking basis. "Compliance with the Expenditure Benchmark (EB) would also be called into question if tax buoyancy arising from the proposed budgetary package for 2016 is excluded. The inclusion of such buoyancy appears to go against the letter and spirit of the EB rule...Revenue growth based on temporary demand effects of an expansionary fiscal package does not meet this criterion.
"The Council is strongly of the view that Government plans should be based on expected compliance with the fiscal rules and that the reasons for any deviation should be clearly explained," the Council says.
It adds that "the forecasts for government spending in SPU 2015 do not present a full picture of the likely costs of demographic ageing and cost pressures in delivering existing public services. Published tax revenue forecasts do not take into account Government commitments to reduce taxes. Given these shortcomings, the deficit projections in SPU 2015 do not provide a useful picture of the fiscal position after 2016. Realistic medium-term budgetary projections are essential to underpin budgetary planning and to avoid a repeat of past mistakes.
"Non-interest government spending is projected to fall by over 5 percentage points of GDP between 2015 and 2020. This would appear very challenging to achieve while maintaining current services and meeting demands for increases in public services. The budgetary position would be less favourable if the Government’s projections are adjusted to reflect stated policy intentions. Under the Budgetary Frameworks Directive, plans should be provided both on a no-policy change basis and also based on 'policies envisaged' by the Government."
The IFAC also says that Government’s plans as laid out in its SES economic statement in April will cut the so-called structural deficit by only 0.3 percentage points of GDP, when the EU rules require the Government to meet a target of double that figure of 0.6 percentage points.
Michael Noonan, finance minister, is preparing to announce Budget 2016 in October with the goal of putting the Coalition in a strong position to win the general election that has to be held by March 2016. He said when presenting the SES: "the Government will be in a position to introduce our second expansionary Budget in October. Fiscal space of the order of €1.2bn and up to €1.5bn will be available for tax reductions and investment in public services. The final scale of the space will become clearer closer to the Budget."
Every IFAC assessment since 2011 has been ignored by the Government but it will be more difficult to ignore the European Commission.
The IFAC report is available here.
Property bubble déjà vu?
The OECD said on Wednesday in a brief summary on the Irish economy that "Fast-rising property prices, both in the housing and office-building markets, are reminiscent of the bubble period of a decade ago. Further macro-prudential tools should be used, if necessary, to prevent investors becoming excessively exposed."
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The OECD also said that fiscal policy is expected to exert a smaller drag on activity than in past years. "Strong revenue growth and low interest costs should be used for more rapid reduction of still-high public debt. Financial conditions have become favourable, but the problem of non-performing loans persists, impeding the full return to normal credit supply. Structural reforms should prioritise getting more people back into work, by making the tax and benefit system more efficient and enhancing activation policy."