The decision to ease up on austerity in October’s budget could backfire and force the Government to introduce a tougher-than-planned budget next year if growth undershoots, the Irish Fiscal Advisory Council has said.
There is no “margin of safety” over the next 12 months as the Government faces €2bn in budget cuts next October in an effort to bring the budget deficit below the 3% target agreed with the troika by 2015, said the council.
The council now estimates there is a 50% chance the Government will miss its fiscal targets, compared with a 33% chance at the time of its last fiscal assessment report during the summer.
The planned €2bn in consolidation next year is predicated on growth reaching 2% over the course of 2014. However, if growth was to come in weaker than expected at 1.5%, then the Government would have to implement total spending cuts and tax increases of €2.69bn next October, according to the council.
Worryingly for the Government, the international consultancy firm Ernst & Young yesterday downgraded its growth forecast for the economy for next year from 2.2% to 1.6%. EY also downgraded its growth forecast for 2015 from 2.6% to 1.9%. The European Commission’s 2014 growth forecast for Ireland is 1.7%.
The fiscal council forecasts that if growth was to come in 0.5% weaker than the Government’s 2.3% estimate for 2015, then the level of budget cuts needed over the next two years would be €1.29bn greater than the cuts currently planned.
The council had been one of a number of critics of the Government’s decision to introduce a €2.5bn budget in October instead of the €3.1bn it had agreed with the troika. The Government argued that, even with €600m less of spending cuts and tax increases, it was still on course to bring the deficit below 3% by 2015.
Moreover, Michael Noonan, the finance minister, increased the 2014 growth forecast from 1.8% to 2% on the basis that lower spending cuts would boost economic activity.
The chairman of the fiscal council, John McHale, said he was confident the Government would implement budget cuts greater than €2bn next October if it had to, “as it is committed to reaching the 3% budget deficit target by 2015”.
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