Credit rating agency Fitch said the stimulus provided by Budget 2016 was likely to fan economic volatility as it declared the overall package was consistent with improving public finances.
In a note on Thursday, the agency said the strengthening fiscal performance since the start of the year made room for stimulus in the Budget without putting the original deficit target in danger.
However, stronger growth than expected meant that the Budget stimulus was “ pro-cyclical and therefore likely to increase economic volatility.”
Alongside rival agency Standard & Poor’s, Fitch maintains an A-rating on Ireland’s debt. Although the expansionary Budget has been criticised by the Irish Fiscal Advisory Council, Fitch said that some fiscal easing ahead of the general election was not surprising.
Further deficit narrowing
“It does not change our expectation of further budget deficit narrowing, with Ireland exiting the excessive deficit procedure (EDP) in 2016, and debt-to-GDP continuing to decline, albeit from a very high level,” said Fitch.
“The sovereign’s fiscal credibility has been underlined by its meeting of the original EDP deadline set nearly five years ago, after reducing the headline deficit by nearly 10 [percentage points]\.
“A strengthening recovery and favourable financing conditions buttressing fiscal consolidation were among the drivers of our revision of the Outlook on Ireland’s ‘A-‘ rating to Positive from Stable in August.”
Fitch assumed the next government will remain “broadly compliant” with EU and national fiscal rules.
It also expected that a primary budget surplus between 1 per cent of gross domestic product and 2 per cent of GDP would be maintained over the medium term. A primary surplus in the public finances is a surplus before debt servicing payments.
Debt dynamics
“This will remain an important driver of debt dynamics, as it is not clear how long Ireland will maintain the very high growth rates of this year,” it said.
“The large role that economic recovery has played in improving fiscal performance is indicated by the fact that the structural deficit has narrowed significantly less than the headline deficit.”
The Budget did not alter Fitch’s view that budget deficit will continue to narrow, implying declining debt over the medium to longer term.
“The economic recovery has boosted budgetary performance so far in 2015. Exchequer returns in [the third quarter of the year] showed receipts from corporation tax, VAT, and social insurance ahead of target thanks to rapid growth (corporation tax receipts were 44.2 per cent ahead).
“Government spending was €500 million below target, mostly due to lower debt-servicing costs.
Budget 2016 was therefore consistent the Coalition’s decision in 2015 to overspend in the fourth quarter after better-than-expected outturns to September.
