‘Merit to ease €3.1bn adjustment’

The Government should increase capital spending and ease up on fiscal consolidation this year as better than expected tax receipts is leaving room for manoeuvre, Goodbody Stockbrokers’ chief economist Dermot O’Leary has said

The Government has agreed with the troika to meet a fiscal deficit of 5.1% for 2014 and 3% the following year. Based on current projections, the budget deficit will hit 4.3% next year and 2.4% in 2015, said Mr O’Leary.

“It is indeed important that the Irish Government does not lose the market credibility that it has fought hard for over recent years.

“However, at this stage, we believe there is merit to ease the overall adjustment of €3.1bn in 2014 but do so in a way that will preserve that credibility.”

He argues that the Government could proceed with increases in capital spending in 2014 while ploughing ahead with €2.4bn in current spending reductions and tax increases.

The benefits of an increase in capital spending are an immediate pick up in employment while at the same time improving the medium term growth prospects for the economy.

Moreover, if growth falls short of forecasts, capital expenditure can be trimmed because of the one-off nature of these projects.

Mr O’Leary also advocates the Government securing a precautionary credit line through the ESM, which is a pre-condition for future access to the ECB’s outright monetary transactions programme.

Because an ESM precautionary line would come with conditions, this would ensure that the Government maintained fiscal discipline and committed to reforms following the exit from the bailout programme in November.

Overall, the economy remains on track to recover, although growth will be stuttering and fragile, Mr O’Leary said.

However, London-based Capital Economics said the Government debt is still vulnerable to a Greek-style restructuring.

The country still hasn’t fully regained the competitiveness lost inside the euro region and remains vulnerable to swings in the global economy, Jonathan Loynes, chief European economist at Capital Economics, said.

Debt levels, the housing market, and a fragile banking sector may also hamper economic growth, Mr Loynes said.

“Worries about its economic outlook or contagion effects from other troubled peripheral economies could yet re-ignite market pressures and force the Irish Government to turn again to outside help,” Mr Loynes said.

“There is even a risk that Ireland will ultimately need to undergo a Greek-style debt restructuring, perhaps putting its future inside the currency union in jeopardy.”

“Bringing all of the evidence together, it is clear that Ireland deserves a lot of credit for the improvement in its economic performance over recent years,” Mr Loynes said.

“But there are good reasons to doubt that Ireland has yet found a way out of the eurozone’s crisis.”