Saturday 18 November 2017

Figures suggest a tough Budget can't be avoided

Brendan Keenan

Brendan Keenan

HERE'S one for the aficionados: "If growth projections are not met. . . the automatic stabilisers should be allowed to operate around the structural consolidation path."

Exciting stuff, eh? The words come from this month's OECD economic survey of Ireland. At first glance, they seem unimportant – to many, perhaps meaningless. Yet, even if not exciting, they may in the short term be the most important in the whole 130 pages.

Things have changed in the last three months – even in the last three weeks. There is still a legitimate debate about the fiscal stance to be taken in next month's Budget, but it is a different debate from the one we have been having up to now.

That was based on the widespread belief that Ireland would beat the targets for borrowing set out in the original bailout programme. These are expressed, not in billions of euro, but in shares of economic output, as measured by GDP (gross domestic product).

This year's target is 7.5pc of GDP. Despite a tough Budget last year, it is not much different from the 2012 figure, for reasons which have not perhaps have had as much attention as they should. These include the end of payments from the banks for the state guarantee; a one-off payment related to the dramatic liquidation of IBRC; and a €2bn rise in the costs of the national debt, caused by the ending of an interest freeze on promissory notes for the same catastrophic institution.

Somehow, the Government and its statisticians came to the conclusion that the prom note deal freed up €1bn for the 2013 Budget, despite the 30pc rise in interest costs this year.

Maybe it did, based on the argument that the target would still be met this year – probably bettered. Without these one-off bills next year, the 2014 forecast might approach just 4pc of GDP, rather than the 4.3pc set out in last April's stability programme from the Department of Finance. That's a difference of around €600m. Hey presto, knock €500m off the planned Budget correction, said Labour, and give the suckers an even break.

That was then, and this is now. A very different picture from April's guarded optimism appeared in the OECD report. This forecast no growth this year, in contrast to the Department's 1.3pc. Next year would see an anaemic 2pc; not the 2.4pc in the stability programme. This was before last week's CSO figures for the second quarter of the year pretty much confirmed the OECD picture.

The technical point that the economy grew, and was therefore "out of recession", garnered a lot of attention but the figures were, in fact, disappointing. A cumulative shortfall of 1.7 percentage points of GDP over the two years may not sound much, but it amounts to almost €2bn.

An "easy" Budget next month could see the targets missed both this year and next. Not by much, but everyone is fixated on half per cents these days.

These are the numbers Mr Noonan tells us he awaits with bated breath. OECD reports are discussed with governments before final drafting. It would be no surprise if the vital pre-Budget estimates from Finance are closer to those in the report than those produced last April.

The Finance Minister has already shown his hand, saying, in his inimitable way, that the deficit target next year will be "four point something, but four point something high".

That is an acknowledgment that the 4.3pc forecast last April cannot be met. It remains to be seen whether the OECD's 4.6pc qualifies as something high. But that figure assumed the full €3.1bn adjustment in the Budget.

There is what the poet called a "fearful symmetry" here. Labour has nailed its colours to the deficit target, rather than the actual amounts thought to be needed in the bailout programme. It should follow, then, that if adjustments can be less severe because deficits look like being smaller than targeted, there should be bigger corrections if they look like being exceeded.

Nobody, though, is going in for symmetry. The EU thinks Budgets should change only if the deficit is above target, not if it is less. Labour, it would seem, takes the opposite view. The OECD (and IMF) think Budgets should not be changed at all.

This is the meaning of that obscure phrase. The OECD analysts think the original €3.1bn correction should stand. If deficits fall more than targeted, great; if poor growth means they are worse than planned, so be it. Do the extra borrowing and allow that "automatic stabiliser" prevent even further reductions in growth.

Until a few months ago, the Government (including Labour) would have been happy with that, and delighted if they could persuade EU governments and the ECB to go along with it. Talk of recovery saw Labour adopt its present position but it might be glad to get back inside the OECD/IMF tent if the EU cuts up rough about missed forecasts, never mind the frightful, but real, possibility of missing the actual targets in the bailout programme.

Within government, Mr Noonan hold all the aces, thanks to his statisticians. Can they come up with plausible numbers for a deficit of less than 5pc with a fiscal correction of less than €3bn? Do they want to?

The answer to both questions is, probably not but political realities may require a bit of implausibility. The numbers tell only part of the story

As a minimum to placate Labour, a €2.7bn adjustment, say, is a very different creature if growth is weak, than if it is strong, even normal. The April forecasts saw cash growth of almost 5pc next year, while the OECD sees 3pc. The difference would account for much of the €2bn in tax revenues which is supposed to flow into government coffers next year.

Day-to-day government spending will also have to fall by €2bn – which is twice as much as this year's reduction. Whatever the details, it is hard to see how a very unpleasant Budget can be avoided.

Keeping to the "structural consolidation path", i.e €3.1bn, neither more nor less, looks politically horrendous in the absence of growth. All the more so since people have been led to expect some relief.

The four horsemen of the Economic Management Committee (EMC) may decide to stick with the higher growth forecasts, and hope for the best. Conceivably, it could pay off. There is a feeling that the second half of the year has seen some pickup, and the international picture looks a bit brighter.

Next week's Exchequer return for September will be critical. But even if they are promising, relying on good growth in the Budget risks missing the 2014 forecasts, just as the first toes are due to be dipped in the chilly waters of the bond markets. Over to you, gentlemen.

Irish Independent

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Promoted Links

Also in Business