The budget deficit spiralled to 32% of GDP in 2011, as the Government had to include the costs of bailing out the banking system.
Now as part of EU banking union, the three Irish banks, Bank of Ireland, AIB and Permanent TSB, have to undergo a comprehensive review of their assets over the next year to determine whether they are sufficiently well capitalised to withstand future losses.
As it stands there is no EU political agreement to recapitalise banks using ESM funds. Consequently, if the Irish banks need capital following the stress tests, then the Government would have to come up with the funds, which would put huge pressure on its attempts to meet the 3% fiscal deficit target by 2015.
However, IFAC chair John McHale said the council agreed with Minister for Finance Michael Noonan’s assessment that there was “not a shred of evidence” to suggest that the banks would need further capital in 2014.
The latest IFAC Fiscal Assessment Report broadly endorsed the Government’s attempts to restore fiscal rectitude to the national coffers, although it warned that the decision to introduce a €2.5bn budget in October as opposed to the €3.1bn that had been originally agreed removed any margin for error over the next two years as it attempts to meet the 2015 3% deficit target.
“Budget 2014 projections imply compliance with the national budgetary rule in 2013 and in each forecast year out to 2016. This is because the Adjustment Path Condition for the structural balance to converge towards Ireland’s Medium-Term Budgetary Objective (MTO) is met.”
Mr McHale said there was “another tough budget to come” with further adjustments needed in 2015, but the 2016 budget could be neutral with room for modest expansion after that. However, this scenario hinged on the economy returning to sufficient levels of growth, he added.
IFAC had advised the Government to take out a precautionary credit line for when it exits the bailout programme next month.
However, Mr McHale acknowledged that from an economic perspective, this would have been the optimal path to take, EU politics made it very difficult for the Government to pursue such an option.
“Given a fragile international financial environment, the Council would have supported an application for a precautionary credit line. Provided it had come with reasonable terms and conditions, such a facility would have provided valuable additional protection against any renewed funding pressures as Ireland exits the EU/IMF assistance programme.”
Mr McHale said he was satisfied that there was enough dialogue between the Department of Finance and IFAC when the budget was being prepared to ensure that the council’s views were taken on board.