Business Irish

Thursday 8 December 2016

Fiscal Council warning: Government risks making same mistakes that led to financial crisis

Thomas Molloy and Colm Kelpie

Published 04/06/2015 | 02:30

Minister for Finance Michael Noonan
Minister for Finance Michael Noonan
Chairman of the Irish Fiscal Advisory Council John McHale

The Government has no real plan and is too optimistic about future economic growth, the country's economic watchdog warns in a report published today.

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In the first detailed independent analysis of Finance Minister Michael Noonan's Spring Statement, the Irish Fiscal Advisory Council has warned that the Government is breaking budget rules imposed on all European Union governments. Forecasts fail to take full account of an ageing population, spending pressures or promised tax cuts, the budgetary watchdog adds.

The Government "is not fully compliant with the rules and as we look further there isn't really a plan at all", council chairman John McHale said.

The council was set up two years ago by the Dáil to look at whether the Government is implementing prudent budgets.It's other tasks include monitoring compliance with Irish and EU budgetary rules, but the council has no power to punish and must rely on persuasion alone.

Prof McHale said the council would have to wait until October to decide whether Mr Noonan's plans were prudent, but warned the failure to implement the rules "certainly raises issues about whether a prudent policy is being followed".

The council's latest report questions the credibility of Government forecasts, arguing that they do not make enough allowance for spending on health or population growth. It also notes that promised tax cuts have not been factored into economic forecasts after 2016.

In a damning comment on the economic forecasts underpinning Mr Noonan's Spring Statement, the council finds that plans to reduce spending on buildings and other projects are "really not credible".

While criticising the Government's failure to follow the rules agreed with Brussels to encourage responsible budgeting, the council reserves some of its most biting criticism for the rules themselves, which are dismissed as overly complex. "It is very hard for the public to buy into something that is almost incomprehensible," Prof McHale said.

The council warns that under EU rules, better-than-expected tax revenues can't be used to fund higher public spending along the lines expected to be announced in October's Budget.

It also points out that the Government is at risk of breaching EU rules designed to ensure a steady reduction in the structural deficit - the public sector spending deficit that exists even when the economy is operating at full steam.

The council says the so-called structural deficit must be improved by 0.6pc each year until a balanced budget is achieved. Yet, the projected improvement for next year is 0.3 percentage points.

It also said that while Europe had signed off on Ireland's request for greater spending flexibility, increases in revenue due to tax buoyancy cannot be use to fund higher spending.

Not everything in the council's report is bad news. The council agrees that the economic recovery is gathering momentum, with stronger growth and lower unemployment benefiting the public finances.

It said it was likely that the Government would bring the deficit to below 3pc next year.

Meanwhile, the latest exchequer return figures show Government revenues for the first five months of 2015 were €734m ahead of expectations.

Irish Independent

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