The new IMF press release is available here. An important segment is
At the same time, the challenges Ireland faces have intensified since the outset of the program, with growth expected to ease to about ½ percent in 2012 owing to a slowing in trading partner activity. The Irish authorities have responded by raising the fiscal consolidation effort adopted in Budget 2012, and the budget remains on track to meet an unchanged general government deficit target of 8.6 percent of GDP. If growth should weaken further, the automatic stabilizers should be allowed to operate to help avoid jeopardizing the fragile recovery.
This point has also been raised in this blog’s discussion of the new Fiscal Compact. If the government implements €X of discretionary fiscal adjustments in a given year T, the realised deficit/GDP ratio in year T will also depend on what type of (positive or negative) cyclical shocks affect GDP in year T (in addition to the direct impact of fiscal policy on GDP). Just as positive cyclical shocks would deliver an ‘over-performance’ in terms of the deficit/GDP ratio, so negative cyclical shocks would deliver an ‘under-performance’. The spirit of the Fiscal Compact is that such deviations should average out to zero over time, rather than being eliminated within-the-year through mini-budgets.
In the current Irish case, there are some extra considerations:
- spending/revenue plans for this year might include some implicit contingency funds, so that the 8.6 percent target can be attained even in the event of an under-shooting of GDP
- given the downside risk, the government might have explicitly planned a larger fiscal adjustment, with the consequence that that the 8.6 target could be met even in the event of an under-shooting of GDP