Business Irish

Friday 22 March 2019

Spending in new downturn justified - fiscal watchdog

Strategy: IFAC chairman Seamus Coffey said policy should ‘lean against’ a deficit caused by a slowdown
Strategy: IFAC chairman Seamus Coffey said policy should ‘lean against’ a deficit caused by a slowdown

David Chance

Finance Minister Paschal Donohoe would be justified in running a budget deficit in the event of a shock to the economy, Seamus Coffey, the chairman of the Irish Fiscal Advisory Council told the Irish Independent yesterday.

Mr Coffey's comments came after Central Bank Governor Philip Lane said earlier this month that the department would be justified in boosting the economy in the event of a big economic shock.

The Central Bank had warned that a hard Brexit could slash growth here to just 1.5pc this year, well below mainstream forecasts of rates of 4pc-plus.

"If a deficit is a result of a slowdown there should not be an issue with fiscal policy leaning against this," Mr Coffey said, noting this was a different situation from the kind of "structural deficit" of 10 years ago that required spending cuts. The Fiscal Council has traditionally urged the government to build budget buffers and, in recent years, sharply criticised out of control spending in areas like health.

But Ireland is the most exposed of any nation in the European Union to Brexit and although even in the worst case scenario it would still be growing, it would do so at a fraction of the pace of the 7.5pc recorded in 2018, when surging company tax receipts allowed the Government to post a budget surplus of around €100m.

Prof Lane told a financial conference in Dublin earlier this month: "The state of the public finances will permit the running of a counter-cyclical fiscal deficit through the operation of the automatic stabilisers on tax revenues and transfer payments."

Aside from the threat of Brexit, which is now just 34 days away, the economy here is one of the most open in the world, with annual exports of goods and services of €250bn, and those exports could put Ireland in the firing line of a looming trade war between the US and Europe.

The call for a renewed look at running budget deficits to lean against economic downturns has recently received a boost from some of the world's top economists.

Years of austerity, especially in the eurozone where governments are shackled by the Stability and Growth Pact, have come under fire.

The slow pace of Europe's recovery from the financial crisis has left the European Central Bank with few tools to counter what could be an imminent recession in the 19-member bloc as its main interest rates are still at zero.

A report from ratings agency Standard & Poor's this week said that eurozone sovereign borrowing from commercial sources will increase 1.6pc this year to €881bn.

Even after this increase, borrowing levels will still be around the lowest in a decade and, with low rates set to stay, debt servicing costs will also be smaller than anticipated.

Leading economists like Olivier Blanchard, the former chief economist at the IMF, have urged a new look at using budgetary policy to offset downturns and for investment, saying that with borrowing costs set to remain well below the pace of economic growth, governments can afford to spend more.

Irish Independent

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