Budget unnecessarily volatile, says OECD

The Government spurned the opportunity to protect the economic safety of the country by delivering a budget underpinned by unnecessarily volatile fiscal policies.

Despite painting a broadly positive picture of the country’s economic situation, the OECD’s economic outlook report criticises the Government’s fiscal policy which it says has “prematurely shifted from consolidation to stimulus”.

Senior OECD economist and its Ireland head, David Haugh said while it is understandable the Government wanted to give something back to the public in Budget 2015, the measures announced were pro-cyclical and unnecessary.

“Some of the measures were reversing what was done in the past in terms of narrowing the tax base again so obviously they wanted to deliver some dividends to the public and that’s kind of understandable from a political point of view.

“Ideally, they wouldn’t have stimulation — maybe they could’ve got away with doing no more consolidation and that would’ve been sufficient. To reverse some of the measures they took to widen what was a narrow tax base before the crisis is probably being overly volatile with fiscal policy,” said Mr Haugh.

“From a purely economic point of view it would’ve been better not to do that. They should be taking advantage of when the economy is growing quickly and really use the upside to bank those gains,” he added.

The report predicts the economy will continue to grow strongly over the coming two years but warns that the strong cyclical recovery needs to be complemented with continuing structural reforms to increase competition, raise innovation and make it easier to start and grow a business.

It also warns that the relevance of vocational training to the labour market needs to be improved with about 40% of those unemployed poorly educated and skilled.

A robust rebound has seen a virtuous cycle of growth emerge this year, however, according to the OECD.

“For a long time, growth in Ireland was being driven externally but now the domestic economy is also growing as well so you have a kind of virtuous cycle of rising employment, rising incomes, rising consumption [and] investments are also rising so the financial sector has obviously got a lot stronger than it was a few years ago and its ability to supply credit to the economy is stronger as well,” he said.

He warned however, Ireland still remained vulnerable — especially to external shocks — adding that “things can look great right now but they can change very quickly”.

Threats such as a big slowdown in the US or UK economies, a stagnating eurozone or bond market doubts — to which our high public and private debt makes us especially vulnerable — are the types of risks the Government has missed the opportunity to protect against, he added.


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