Pressure on the Government to find new budget cuts for next year eased substantially yesterday with the release of encouraging economic data for the second day running.
Some economists said the Government may be able to reach its deficit target for next year with a €1 billion budget package, rather than the €2 billion package envisaged earlier.
New figures from the Central Statistics Office (CSO) show the economy performed well in the first quarter of this year, adding to a picture of positive momentum after exchequer figures on Wednesday showed tax returns were about €500 million ahead of target by the end of June.
Furthermore, the CSO, as part of an EU-wide change in how statistics are compiled, produced new estimates for the size of the Irish economy.
These changes have added more than 6 per cent to the size of the economy.
Upward revision
Changes, including how it treats research and development (R&D) investment, as well as the inclusion of estimates of the size of illegal activities such as drug dealing and prostitution, led to an upward revision in the gross domestic product (GDP) figure for 2013.
The bulk of the increase arose from the R&D change.
Although this is just a statistical exercise, it puts pressure on the Government to comply with EU budgetary targets, and in particular its plan to reduce the size of the deficit next year to below 3 per cent of GDP.
It also has a positive impact on the size of the national debt as a percentage of GDP, which in turn affects bond market interest rates.
Minister for Finance Michael Noonan said that on its own the change in the CSO estimate for GDP size would mean this year's budget deficit would be closer to 4.5 per cent of GDP, compared to the target of 4.8 per cent.
“Indeed, if tax revenue continues to perform as it has done in the first half of the year, the outturn could be even better.”
He also said the debt-to-GDP ratio is now closer to 116 per cent, as against the 124 per cent that was estimated at the end of last year.
KBC Bank economist Austin Hughes said previous estimates about the size of the required budget adjustment were based on “a smaller economy than we now perceive it to be” and that as a consequence the coming adjustment did not have to be as big.
“We could get away with an adjustment of close to €1 billion,” he said, while adding that we are only half way through 2014.
Economy grew
Economist John FitzGerald of the Economic and Social Research Institute, said it looked increasingly likely that the Government would not need to make a €2 billion adjustment in next year’s budget.
The CSO Quarterly National Accounts showed GDP was up 2.7 per cent in the first quarter of this year compared to the last quarter of last year.
It also said that a revised estimate for GDP for last year showed the economy grew by 0.2 per cent in 2013.
Earlier estimates had showed GDP contracting by 0.3 per cent.
Economist Alan McQuaid of Merrion Capital said GDP growth for this year is now likely to be greater than 3 per cent and that this “should significantly ease the burden on the level of fiscal austerity required in the October budget”.
Conall Mac Coille of Davy said it now believes Ireland's deficit this year will come in at below 4 per cent, meaning that "little additional action" will be needed to meet next year's 3 per cent target.
