The fragility of the Government's position as it exits the bailout without a special credit line is laid bare in a new report from the Irish Fiscal Advisory Council, the body set up in 2011 to monitor economic policy.
At issue primarily are two big plays by the Coalition. First was the manoeuvre in Budget 2014 to opt for a €2.5 billion retrenchment instead of the mooted €3.1 billion. Second was the decision not to seek precautionary credit.
These were political moves essentially,which serve to make life easier in the short term for Fine Gael and Labour. But they are not without risk.
While the council's reservations about both actions were made clear at the time, it has fleshed them out in detail in a 128-page Fiscal Assessment Report. This examines from an independent standpoint whether the Government policy passes the credibility test. As the troika leaves Dublin, the objective remains that such reports will become established as an important national barometer.
Core fiscal strategy
The council's message is straightforward. It has no real complaint with the Government's core fiscal strategy. But it differs appreciably on the fine-tuning – and the fine-tuning is crucial. In spite of the progress made, the Coalition is cutting it rather thin.
For all the positive rhetoric from Taoiseach Enda Kenny and Tánaiste Eamon Gilmore, something akin to a economic limbo dance is afoot. Fine if everything goes their way. But any little tip off-balance would spell danger.
There is no safety margin at all in Budget 2014 to allow for any shortfall in economic growth. This raises the prospect of increased retrenchment in 2015 if the all-important 3 per cent deficit target is to be met that year. Amid signs that growth elsewhere in the euro zone is faltering, the potential to create significant political difficulty is clear.
“The most likely growth number for 2014 is 2 per cent but, because the risks are tilted to the downside, the actual expected growth is actually something less than that,” said council chairman Prof John McHale. “So if the Government is serious about meeting that 3 per cent target, it’s certainly possible that additional adjustment beyond the €2 billion already forecast for Budget 2015 could be required.”
A further €690 million would be needed if nominal economic growth fell back to 1.5 per cent in 2014 instead of the forecast 2 per cent. This would bring the 2015 retrenchment close to €2.7 billion, far greater than in the 2014 budget. Worse still would be the €3.29 billion needed if growth was projected to fall back again in 2015 .
Near the end of a prolonged austerity drive, any such move would reverse the current trend. If that is unpleasant enough on its own terms, doubly unappealing for the Government is that it would come in a pre-election year.
Would there be an alternative? Achieving the 3 per cent deficit in 2015 is a keystone for market confidence. The sense must be that any move away from it could be contemplated only as part of a generalised easing of deficit targets throughout the euro zone. Don’t hold your breath.
Still, the council finds the basic budget projections to be appropriate .“We assess if the overall fiscal stance is conducive to prudent economic and budgetary management,” said McHale. In his view it is.
As for the credit line, the council, “based on economics”, would prefer an application to guard against any loss of bond market access. At the same time, McHale recognised “European politics” were at play too.
'Prudent management'
He did not appear particularly concerned about the failure to take the council's advice, saying a "different" Government decision did not necessarily mean it was being ignored. "The real test would come if we said that the fiscal stance was not conducive to prudent management," he said .
“At that point, if the Government didn’t take our advice on board, I think we really would have to question the usefulness of the council in that situation. But we haven’t got to that situation. That’s the kind of situation that’s more likely to occur actually in good times than in bad times.”
Advisory council - oversight role
The Irish Fiscal Advisory Council said it had made a complaint to the Government about dismissive “off the cuff” responses by senior Cabinet figures to its reports on policy matters.
Council chairman John McHale, economics professor at NUI Galway, cited one instance in which a report was dismissed first by Minister for Communications Pat Rabbitte, then Minister for Finance Michael Noonan and then Taoiseach Enda Kenny. “It did seem that the level at which we were being dismissed was at least moving up,” he said.
“We did complain about that because we felt it was an unproductive way to respond to us, and now the Government responds either in stability programme update or in budgetary documentation,” he said. “Typically after a report came out, a member of the Government would be asked about it and they gave off the cuff remarks that sometime could seem dismissive . . .
“Really what we were looking for was a more considered response than sort of off the cuff remarks.”
Prof McHale also said the council raised a “significant reservation” with the Department of Finance over one of its provisional calculations in Budget 2014.
This prompted a change to documentation, he said. The council is a statutory body. Under European law, it endorses the macroeconomic forecast underpinning budgets and updates on the EU-approved economic stability plan.
Other members are: OECD economic counsellor Sebastian Barnes ; ESRI professor Alan Barrett; former IMF deputy director Donal Donovan; and Prof Róisín O’Sullivan of Smith College, Massachusetts.
