The Irish Fiscal Advisory Council has published its latest Fiscal Assessment Report. The report and some additional resources are available here.
Accompanying the report is a working paper that looks at how a counter-cyclical “rainy day fund” could be incorporated in the framework of the Stability and Growth Pack. Last week, IFAC published its assessment of compliance with the Domestic Budgetary Rule in 2017 as well as an update of its Standstill Scenario which estimates of the cost of maintaining today’s level of public services and benefits in real terms over the medium term.
A bullet-point summary of the latest FAR:
- A rapid cyclical recovery has taken place since at least 2014 and this is continuing at a strong pace.
- Ireland’s debt burden is still among the highest in the OECD.
- Negative shocks will inevitably occur in future years and there are clear downside risks over the medium term, namely those associated with Brexit, US trade policy and the international tax environment.
- Improvements on the budgetary front have stalled since 2015 despite the strong cyclical recovery taking place – one that is reinforced by a number of favourable tailwinds.
- Any unexpected increases in tax revenues or lower interest costs should not be used to fund budgetary measures.
- The Council welcomes the Department’s publication of alternative estimates of the output gap.
- The Medium Term Objective (MTO) of a structural deficit of no less than 0.5 per cent of GDP was reached in 2017.
- The Council sees the fiscal rules as a minimum standard for sustainability and continues to recommend that the Government commit to adhering to the Expenditure Benchmark even after the MTO is achieved.
And on Budget 2019 in particular:
- The Government should at least stick to existing budget plans for 2019 as there is no case for additional fiscal stimulus beyond existing plans as set out in the 2018 Stability Programme Update.
- Estimates of the medium-term potential growth rate of the economy and expectations of economy-wide inflation for next year imply an upper limit for increasing the adjusted measure of government expenditure of 4.5%.
- In nominal terms this translates into spending increases or tax cuts of up to €3½ billion (“gross fiscal space”) as the starting point for Budget 2019.
- Previously announced measures – including sharp increases in public investment – mean that the Government’s scope for new initiatives in Budget 2019 will be limited.
- If additional priorities are to be addressed, these should be funded by additional tax increases or through re-allocations of existing spending.
- Improving the budget balance by more than planned would be desirable, especially given current favourable times, possible overheating in the near-term and visible downside risks over the medium term.
15 replies on “Latest Assessment Report from IFAC”
Figure 1.6 remains a devastating indictment of the PD/FF legacy of ideological free market economic policy and the lite-touch regulation proposed by the Michael McDowell chaired report in the early 2000s for ministers McCreevey and Harney in the Ahern led governments of the time …..
Ms Harney is now Chancellor of UL and Mr McDowell remains addicted to the limelight ,,,, as does Mr Ahern …. at least Charlie keeps his head down …. probably waiting to become the next head of the Central Bank.
Keep up the good work … like that “modest tweak” to the elasticity of Angela’s corset ….
To me the report underscores the need to simplify or scrap the existing Euro fiscal rules, which in any case are now politically unenforceable ( a fine for France anyone?). They are partly based on the Output gap, which is unobservable, and in Ireland’s’ case we have no idea whether it is positive , as the EC believes, or negative. That would leave room for a Council to judge whether fiscal policy is appropriate , but not using the byzantine rules imposed from Brussels..
Whatever about the report itself, it’s interesting that the political opposition to the rainy day fund (from the left) talks about needing to spend money on two areas of Irish life where costs are wildly out of control; housing and health.
You might or might not agree that the housing crisis or health crisis are worth spending money on now instead of having a rainy day fund, but SURELY it’s at least worth caring about the cost of getting results in housing or health if you do want to spend the rainy day fund. Yet neither Labour nor SF even mentioned the idea that there could be a way of getting better results if the costs in either area were driven down. Nope…just assumed existing high costs as the baseline and spend away. Madness.
And on the same point….the IFAC seems concerned that building more houses could cause overheating in the economy.
This is based on the assumption that houses are inefficiently built by thousands of highly paid burly men standing in muddy fields. That assumption has not been true for a long time and is less and less true all the time. Here are two examples of why that assumption is a bad one. Factories can produce houses quickly and easily without the need for economy distorting numbers of brickies.
And on health, there’s no better quick reference than this finfacts article.
We could maintain a rainy day fund and address the health and housing crises at the same time, if only people looked beyond “more money” as being the only solution.
The claim in Finfacts that Ireland has the worst health outcomes is pure baloney. Who produces such drivel? Outcomes are measured by life expectancy. Eurostat gives life expectancy figures for all EU countries in 2016. Ireland ranked joint 8th highest (of 28) and had a life expectancy of 81.8 years, which was 0.6 years higher than the UK (81.2) and 0.8 years higher than Germany (81.0). Mediterraenean countries had the highest life expectancies (climate-related). Of non-Mediterraenean countries only Luxembourg and Sweden were higher than Ireland. While the gap with the best countries has narrowed dramatically. For example, in the mid 1990s life expectancy in Sweden was 3.8 years higher than in Ireland. By 2016 the gap was 0.6 years (82.4 v 81.8). Thanks to 40 years of socialism, Eastern Europe countries had the worst life expectancy, with Bulgaria, Latvia and Lithuania all having life expectancy of 74.9 years (6.9 years less than Ireland), So much for Ireland being the worst. I’d have though that the Eurostat database was a better source of data on health outcomes than a Finfacts article.
Talking of health, I am happy to say that I have completely recovered from my own recent illness.
John, it’s great to have you back and wonderful to learn about you good news on the health front. Long may it last.
As for health expenditure and outcomes I think the key point is that Ireland spends an enormous amount of money relative to other countries and this is not reflected in the relative outcomes. Indeed, for the money spent in Ireland could have a Rolls-Royce version of a universal, single funder health system (similar to what the English NHS is supposed to be), but there is far too much class prejudice, localism, money-grubbing, inefficiency and rent-seeking.
I heard a rumour that you were thinking of togging out for Tyrone in the qualifiers!
Stay well. Blind Biddy sends her regards!
Seven-of-9 is staying well clear of These Islands at the mo …
Happy you’ve recovered from whatever illness.
But in the meantime, Ireland does have thousands of people waiting on trollies and I point out that the article talks about the OECD, which includes most (or all?) of the EU countries. Ireland is at the very top end of spend and at the low end of results…however you slice it. That adds up to bad value. Having lived in a number of countries, my personal experience certainly attests to that.
And as for wondering who produces such “drivel”, the references are in the article.
This is another example of the high quality reporting and analysis we’ve come to expect from IFAC. Many thanks to all involved. And even though its remit is so constrained that it’s forced to focus on the relatively small changes in huge quantums of fiscal revenue and expenditure, it’s good to see IFAC push the boundaries of the policy envelope a little by looking, for example, at this “rainy day fund” (RDF) and the impact of the exit of a large multinational firm (MNF).
It would of course be better if this RDF were to be established as what it should be – an MNF risk insurance fund with a large chunk of corporate tax contributions from the MNF enclave being terated as winfall gains and applied as insurance premiums to insure against any damaging impacts of their strategic decisions which they invarably make without any serious consideration of the impact on their host. But we couldn’t contemplate this as it would begin to question the Great Redistribution which is presented as transfering resources and income to the lower income percentiles (that brings Ireland’s measure of inequality closoe to the OECD average), but, in reality, provides a huge trough for the rent-seeking flunkies and functionaries who admminster and service this great redistribution.
Thanks for your kind comment, Paul.
What you say may well be correct. I wouldn’t disagree with it.
What I was challenging was the claim in Finfacts that outcomes in Ireland are the worst. That are not. They are 8th or 9th best in the EU. You may well say that, in view of the money spent, they should be better than that and I wouldn’t disagree at all.
Hi John. Great to hear from you again. Brian.
“clear downside risks over the medium term, namely those associated with Brexit, US trade policy and the international tax environment.”
Systemic risk is El Gordo
Italy is in serious trouble.
An old friend of the blog, Lorenz Bini Smaghi ,now works for Société Générale. He is in today’s Le Figaro saying he regrets that Italy didn’t restructure. The main political parties are now gone.
The central bankers’ models are dud. It is just a matter of time before neoliberalism blows up.
Great to have you back JTO.