Tuesday 25 October 2016

Budget 2016: Fitch and Moody's highlight loosing of purse strings

Colm Kelpie and Donal O'Donovan

Published 16/10/2015 | 02:30

Fitch: rating unchanged
Fitch: rating unchanged

The stimulus boost provided by Budget 2016 is likely to increase economic volatility, ratings agency Fitch has said.

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The ratings giant nonetheless said the Budget was consistent with improving finances, arguing that the strong fiscal performance since the start of this year had made room for some giveaways.

And it said some stimulus ahead of an election was not that surprising. But the agency did warn that the Budget was "pro-cyclical" and therefore likely to increase economic volatility.

A pro-cyclical policy in Budget terms entails cutting taxes and hiking spending in good times, and then needing to cut back when things turn sour. But overall, Fitch's assessment has been broadly positive.

"Some fiscal easing ahead of general elections, which must be held by 8 April next year, is not surprising. 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," Fitch said in a note.

"The sovereign's fiscal credibility has been underlined by its meeting of the original EDP deadline set nearly five years ago," it added. Fitch said that it assumed the next Irish government would remain broadly compliant with the EU and national fiscal rules.

"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. 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 agency said.

"Furthermore, with stronger-than-expected growth the fiscal stimulus in 2016 is pro-cyclical and therefore likely to increase economic volatility."

Meanwhile, rating agency Moody’s said this week Budget signalled a “loosening of fiscal policy” but that the country is on course to meet deficit targets.

Moodys is the last of the big rating agencies not to regard Irish government debt as a high quality “A” rated investment.

Reacting to the Budget, Moody;s said Ireland’s public finances are now improving at a very fast pace, which is credit positive.

“However with that said, the budget signals a loosening of fiscal policy compared to previous years, with the government fully using the fiscal space that the domestic and European fiscal rules allow.”

Increased spending, including the supplementary increase to the 2015 Budget that have been announced by the Government is feasible without endangering the budget targets because tax - especially corporation tax – is likely to come in €2.3bn ahead of target, this year.

Irish Independent

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