A modest amount of additional fiscal adjustment over what is planned by the Government is warranted given the fragile position of the public finances, the chairman of the Fiscal Council has told an Oireachtas committee.
Prof John McHale also told the committee many of the rules in the Fiscal Compact already existed in the European Union and the euro zone. The compact is more about improving the enforceability of the rules, he said.
Prof McHale told the Joint Committee on Finance, Public Expenditure and Reform the council had decided its remit did not involve it having to take a view on the compact, and he was speaking in a personal capacity.
In the “post bubble Irish economy” normal uncertainty about future growth levels is heightened, he said. Irish debt sustainability is “very fragile” and it would be worthwhile to have the “insurance” of greater debt reduction.
Further negative shocks could see the Irish debt spiralling upwards and Ireland having to close the deficit through “cold turkey”.
He said bond yields appeared to be stuck at 7 per cent and this was still too high to allow Ireland back into the market on a sustainable basis.
He said the Government was faced with a difficult decision and the deficit target of 3 per cent by 2015 was in the range of appropriate action.
He said there was also an inter-generational aspect to the calculation, as taking on a higher debt burden shifted the debt to younger generations.
Prof McHale told Fianna Fáil’s Michael McGrath that Ireland’s return to the markets would be “challenging” and the best chance would be if it had a “back up source of funding”.
Council member Dr Donal Donovan said it was too early to say if Ireland would be able to borrow from the market within the current timeframe, given all that was happening in Ireland and abroad.
He said by the middle of next year the Government will be preparing its budget for 2014 and would need to know where it would access funding for the envisaged deficit.
Sinn Féin’s Mary Lou McDonald said most people thought of the council as “the group that comes out saying you are not cutting enough”.
She said it lacked credibility to argue that Ireland might find itself in need of funding and be rejected by the European bail out mechanism.
Prof McHale said it would be “good Keynesian principles” to apply a stimulus to the economy “but we have a very large debt and are not credit worthy.”
Council member Prof Alan Barrett said foreign direct investment and exports don’t produce the same level of employment that they did 20 years ago.
Domestic demand was needed to get employment growing again.
Most projections for the future of the Irish economy had a built in expectation of a gradual return to normal growth rates but it was not known how long the debt overhang would continue to affect the economy.
“Growth could remain very flat and so the debt sustainability issue will remain,” he said
