Fiscal Assessment Report September 2012: Discussion with Irish Fiscal Advisory Council
Vice Chairman:   We will begin our review of the fiscal assessment report, September 2012. From the Irish Fiscal Advisory Council, I welcome Professor John McHale, chairman, Professor Alan Barrett, council member, Mr. Sebastian Barnes, council member, Dr. Donal Donovan, council member, and Mr. Diarmaid Smyth, chief economist. I understand that Dr. Róisín O’Sullivan is unable to attend today's meeting and sends her apologies. Ms Eimear Leahy, economist and Ms Rachel Joyce are also in attendance. Professor McHale will make some opening remarks, which will be followed by a questions and answers session. I remind members, witnesses and those in the Visitors' Gallery that all mobile telephones must be switched off.
I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If witnesses are directed by this committee to cease giving evidence in relation to a particular matter and they continue to do so, they are entitled, thereafter, only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that where possible, they should not criticise or make charges against any person, persons or entity by name, or in such a way as to make him or her identifiable. Finally, members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
Professor John McHale: Good afternoon Chairman and members of the committee. On behalf of the council, I thank the committee for providing us with the opportunity to appear here to publicly explain our assessments. The council has found earlier feedback from the committee extremely useful in developing the content of our reports. The other council members in attendance today are Mr. Sebastian Barnes, Professor Alan Barrett and Dr. Donal Donovan. Unfortunately, Dr. Róisín O’Sullivan, who is based in the United States of America, cannot attend today. The council's secretariat is also present, namely, Ms Rachel Joyce, Ms Eimear Leahy and Mr. Diarmaid Smyth.
Today we will deal with our third fiscal assessment report, which was published on 13 September. The report is written in line with the mandate of the council, set out in the fiscal responsibility Bill. The main purpose of this report is to assess the macro-economic and budgetary projections set out by the Government in the stability programme update, SPU, published in April 2012, including the appropriateness of the overall fiscal stance for the period to 2015, in advance of budget 2013. The report also sets out some background for our planned future assessments of compliance with fiscal rules. A number of themes are developed in this report. These include the uncertainty that surrounds economic and budgetary forecasts, the large size of remaining adjustments required for debt sustainability and the importance of transparency in the recording of revisions in the Government's fiscal accounts and plans.
In assessing the Government's macro-economic forecasts, a multi-step approach is followed. First, we assess the performance of past forecasts, using the most recently available national accounts data. Second, we compare the Government's forecast with contemporaneous forecasts from other agencies. Third, we examine the pattern of revisions to the forecasts and, fourth, we explore the uncertainties surrounding the forecasts using past forecast errors to develop confidence intervals around the forecasts of different horizons.
The national income and expenditure accounts for 2011, released in July, estimate that annual real GDP growth in 2011 was 1.4%. This was higher than official forecasts, while real GNP growth in 2011 was almost three percentage points lower than forecast by the Department of Finance in 2011. An analysis of the forecast errors over the period 1995 to 2011 indicates that the pattern of past forecast errors is similar across the main forecasting agencies and does not show evidence of bias. Current Department of Finance forecasts for 2012 to 2015 are also similar to the forecast of other agencies. In general, forecasters remain of the view that growth rates of about 3% will return over a two to three year horizon, although earlier forecasts of such a rebound have not materialised.
The uncertainties surrounding the growth outlook for the Irish economy, highlighted in the council's previous report, remain and are illustrated in this report through the use of fan charts. A fan chart shows the uncertainty that surrounds the forecasts at different horizons. The council sees the risks to growth as being weighted to the downside. More generally, we recommend that this uncertainty should be more explicitly factored into the presentation of official forecasts through a more detailed sensitivity analysis.
In assessing the budgetary projections, the council again follows a multi-step approach. First, we review the accuracy of past Department of Finance forecasts, including a detailed examination of data and forecast revisions. Second, we examine the SPU projections, using the most recent Exchequer data. Third, we compare the SPU forecasts with contemporaneous forecasts of other agencies and, fourth, we explore the uncertainty surrounding the projections using a combination of fiscal fan charts and sensitivity analysis.
The general Government deficit, adjusted for the impact of banking related transfers, is estimated to have improved to 9% of GDP last year. This is approximately €1.2 billion better than had been anticipated in last December's budget. For 2012, the forecast for the general Government deficit was revised to 8.3% of GDP in the SPU, from 8.6% in the budget. This reflected, in part, revisions to interest payments and the impact of banking related revenues. The council is of the view that a general Government deficit of 8.3% of GDP for 2012 looks achievable at this stage, based on the cumulative trends in the Exchequer data and the economic outlook. That said, there have been significant spending overruns in health and social protection over the first eight months of the year. There has also been a notable increase in non-tax revenues, partly related to the State's involvement in the banking sector. These sources of income should be closely monitored.
There were a number of significant changes to the official budgetary data and forecasts over the past year. To facilitate adequate assessment of budgetary projections, the council urges that comprehensive and timely explanations be provided on methodological changes in data revisions that impact on the fiscal outturn or official forecasts, on sources of major modifications to the forecasts and on the components of non-tax revenues.
For the period 2013 to 2015, the SPU budgetary projections are in line with projections from other agencies. This outlook is heavily dependent on achieving significant reductions in Government expenditures and a sustained upturn in growth. Given the extent of the required total adjustment, the council again urges that all adjustment margins be kept under close review, including tax rates, public sector pay and pensions and welfare rates. In light of the uncertainty surrounding the growth outlook and a suggestion from this committee previously, the report also considered the sensitivity of the budgetary projections to changes in the macro-economic outlook, including the use of fan charts. This analysis serves, once again, to highlight the fragility of debt sustainability.
The council's view on the appropriate fiscal stance was again widely reported, following the publication of the report. As in earlier reports, the appropriateness of the fiscal stance is analysed in terms of a trade-off between supporting domestic demand and ensuring debt sustainability. The council assesses the Government's current fiscal stance to be conducive to prudent economic and budgetary management. However, debt sustainability and creditworthiness remain fragile.
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