Wednesday, 24 April 2013
Joint Committee on Finance, Public Expenditure and Reform DebatePage of 23
Fiscal Assessment Report 2013: Discussion with Irish Fiscal Advisory Council
Vice Chairman: I welcome members of the Irish Fiscal Advisory Council: 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. Dr. Róisín O'Sullivan is unable to attend today's meeting and has sent her apologies. Ms Rachel Joyce is also in attendance.
Professor John McHale: On behalf of the council, I thank the committee for providing us with the opportunity to attend to explain our most recent assessment. The council views interactions with this committee as integral to our work. In addition, this is our first appearance as a statutory body before the committee, following the passing of the Fiscal Responsibility Act. Other members in attendance today are Mr. Sebastian Barnes, Dr. Alan Barrett and Dr. Donal Donovan. Unfortunately, Ms Róisín O'Sullivan, who is based in the United States, cannot attend today. Mr. Diarmaid Smyth from the council secretariat is also present.
Today I will cover our fourth assessment report which was published on 10 April. The report is written in line with the mandate of the council. Its main purpose is to assess the macroeconomic and budgetary projections set out by the Government in budget 2013, including the appropriateness of the overall fiscal stance in advance of the stability programme update. The report also considers compliance with the budgetary rule set out in the Fiscal Responsibility Act.
There were a number of developments post budget 2013 that had a bearing on the conclusions reached in the report. First, the fiscal outturn in 2012 was significantly better than had been estimated in budget 2013. The Department of Finance had estimated a general Government deficit of 8.2% of GDP in 2012. Based on end of year Exchequer returns and higher than expected nominal GDP, a deficit of 7.7% of GDP was assumed in the fiscal assessment report. On Monday, the CSO reported that the 2012 general Government deficit was 7.6% of GDP which was also well below the programme target of 8.6%. Second, the promissory note transaction, while having a limited effect on the deficit this year, is estimated to reduce the deficit in 2015 by 0.6% of GDP. Cumulatively, the impact of these developments is estimated to be equivalent to about €1.6 billion of additional adjustments over the period 2014-15. This is based on technical adjustments made by the council to budget 2013 projections. Given this and assuming full implementation of the Government's planned €5.1 billion in adjustments over 2012-1015, the general Government deficit in 2015 now appears likely to be close to 2% of GDP compared to the official forecast of 2.9%.
In our previous assessment report last September the council assessed that the fiscal stance was conducive to prudent economic and budgetary management. However, recognising the uncertainties surrounding growth and credit worthiness at the time we made a case for the need for a further €1.9 billion in additional budgetary adjustments. We argued that this would provide a margin of safety to ensure the successful achievement of programme targets, given the fragility of the Government's fiscal position. In this report, taking on board post budget 2013 developments, we are no longer making the case for this additional adjustment. Given the recent developments, the margin of safety argued for by the council in previous reports has been largely achieved. However, the Government's planned adjustments of €3.1 billion in 2014 and €2 billion in 2015 should not be reduced. There is no room for complacency, notwithstanding the recent success in meeting fiscal targets. Even with the implementation of the planned €5.1 billion in adjustment in 2014-15, analysis by the council suggests there is approximately a one-in-three probability that the deficit to GDP ratio would be above 3% of GDP in 2015 in the absence of offsetting adjustments.
The fiscal assessment report again highlights the significant challenges remaining on the expenditure side to 2015. Expenditure pressures in health and social protection in 2012, in part driven by service demand, have underlined the implementation challenge. The payroll savings envisioned under the Croke Park extension agreement represent a significant component of total planned expenditure reduction. The macroeconomic environment also remains unusually uncertain. While there are tentative signs that the domestic economy is stabilising, the external environment - especially in Europe - has weakened since the publication of the budget.
Budget 2013 projections imply compliance with the national budgetary rule in 2013, 2014 and 2015. The structural balance, namely, the general Government balance adjusted for the cycle and one-off factors, plays a key role in both domestic and EU rules. In this report, we have drawn attention to the need for the development of a more comprehensive domestic analysis around estimates of the structural budget balance. A robust return to State creditworthiness, which has continued to show the improvement highlighted in the September 2012 fiscal assessment report, should be further reinforced by the recently announced extensions to the maturities on EFSF-EFSM loans. Post-programme precautionary funding arrangements could also help underpin a sustainable return to market funding.
Again, I thank the committee for providing us with the opportunity to attend today. Since our last appearance, the budgetary outlook has improved and fiscal objectives in 2012 were complied with by a comfortable margin. However, significant challenges remain. We look forward to once again hearing the views of members and taking any questions.
Senator Thomas Byrne: I apologise on behalf of my colleague, Deputy Michael McGrath, who cannot be present for the entirety of the meeting. The council's assessment, restated today, is that the planned adjustments of €3.1 billion in 2014 and €2 billion in 2015 should not be reduced. Given that we are likely to overshoot the runway, so to speak, by going beyond the 3% target, is there a case for easing up by approximately €500 million to €600 million this year in order to give a boost to consumer spending and confidence in the economy? There appears to be some talk of that and Ministers seem to be rushing to the press with predictions of tax cuts. Do the council members believe it would be a good idea for the Government to do that? Would it benefit the economy?
My next question relates to capital expenditure. Does the council believe the Government is getting the mix right in regard to current and capital expenditure? The capital budget was underspent last year by €145 million and the consequences are plain to be seen. In County Meath and other counties one can see the roads crumbling which has to do with the fact that this money was not spent. To the end of March 2013 only €387 million was spent on capital projects, which is a very low figure.
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