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.