Fiscal Advisory Council: Key deficit target 'at risk due to soft Budget'
THE decision to have a softer-than-expected Budget means a greater risk that a crucial EU deficit target will not be met by 2015, a watchdog has warned.
The Fiscal Advisory Council said "very substantial risks" remained and because of this easing off, there was a 50pc chance the target would be missed. It warned that the Government would need a tougher budget in 2015 to meet the target if growth doesn't pan out as expected.
Under EU rules, the Government must reduce the budget deficit – the gap between how much the State spends and how much it takes in through taxes and revenue – to below 3pc of the value of the economy by 2015. It's expected to come in at 7.3pc this year.
John McHale, Fiscal Advisory chair, said more austerity may be needed beyond 2015 if growth stagnates.
"If growth turns out to be lower than projected, if this balance sheet recession turns out to be more persistent than we currently fear, people will be familiar with the term of a lost decade in Japan, you can have long periods of very disappointing growth following financial crises," Mr McHale said.
"The signs are that Ireland is pulling out of it, but you can't discount the possibility that this will be more prolonged than is currently thought.
"But based on the best guesses for the moment, the difficult phase should be over after 2015."
In the run-up to last month's Budget, the Fiscal Advisory Council said the Government should stick with the plan to impose €3.1bn worth of tax hikes and spending cuts.
But Finance Minister Michael Noonan opted to go for a €2.5bn adjustment, and relied on savings elsewhere to make up the balance. The Government is now projecting that the budget deficit will be 2.9pc of gross domestic product in 2015, but Mr McHale said it would be 2.6pc had the Government followed through on its planned €3.1bn adjustment.
In its latest assessment report, the council, which must endorse the economic projections on which the Finance Department bases the budget, said there was some public confusion about the size of the adjustment in Budget 2014.
It said future budget statements should identify clearly the impacts of the measures.
The body also stood by its advice that the Government should have applied for an overdraft on leaving the bailout.
Mr McHale said it was a "reasonable decision" not to take a precautionary credit line, but it would have provided another layer of protection.
Asked if he felt frustrated that the Government had ignored the council's advice on the Budget adjustment and credit line, Mr McHale said he believed it was being listened to.
"So even if they come to a different decision, we do not consider that to indicate that they are ignoring our advice."
The council said it did not expect the banks to need further capital after EU-wide banking stress tests next year.
Mr McHale also said that the Government's decision to abandon plans to force thousands of self-employed people to pay their tax early because of earlier budgets would make budgetary preparations more difficult.
By Colm Kelpie