Troika: Budget 2017 leaves Ireland vulnerable to shocks

The European Commission has said that by doing little to broaden the tax base in the October budget, the Government has left the country’s finances potentially exposed to future shocks.

In a joint statement marking the end of the so-called troika’s sixth post-bailout programme “surveillance mission” to Ireland, the commission and European Central Bank (ECB) yesterday said that while Ireland’s economic prospects “remain bright”, “some clouds are on the horizon”.

“While GDP is expected to continue to grow at robust rates, the future evolution of the activities of multinational enterprises remains uncertain and the external environment has become increasingly unpredictable especially after the UK ‘leave’ vote,” they said.

They said the Government’s target of a debt representing 45% of GDP by the mid-to-late 2020s is to be welcomed, but only puts greater importance on compliance with the EU fiscal framework.

Earlier this week, budgetary watchdog the Irish Fiscal Advisory Council, said that the October budget breaks EU rules in that the Government will likely spend €200m more, in carrying out its plans, than the EU allows for national budgets.

Touching on Budget 2017, the commission and ECB said: “The 2017 budget aims to exhaust the available fiscal space and little has been done to broaden the tax base in this budget, leaving the public finances vulnerable to shocks.

“Further current spending increases and tax cuts could narrow the scope for public investment in infrastructure, making it difficult to address bottlenecks and boost the long-term productive capacity of the economy,” they added.

“Increased external uncertainty puts an even greater premium on prudent fiscal policy and a reorientation of public spending toward investment.”

Regarding the banks, the troika said that while capital levels have improved, obvious legacy issues remain and the resolution of non-performing loans “needs to maintain momentum”.

The commission and ECB, however, are opposed to any plan to have the Central Bank capping interest rates on variable rate mortgages.

“If enacted, [it] could interfere with the smooth transition of monetary policy,” they said.

“It could also have implications for banking supervision and financial stability. Moreover, a decision to direct lenders as to the interest rate they can charge could lead to a decrease in competition and have a deterrent effect on potential new entrants to the market, thereby inhibiting credit extension at sustainable market rates.”