Economy ‘not as strong as figures suggest’

The underlying health of the economy is not as good as official growth figures suggest, the Irish Fiscal Advisory Council (IFAC) has warned.

According to official data, Ireland was the fastest growing economy among the 28 EU states over the first six months of the year with an increase in GDP of 7.6%. However, IFAC estimates that, stripping out the effect of “contract manufacturing”, the actual growth rate was 3.6%.

Over the past couple of years, a number of Irish-based big multinationals have outsourced manufacturing to other countries, but the sales of these products are booked in Ireland. The effect of this practice is to inflate the Irish GDP figure through higher exports, yet it does not lead to any increased employment or benefit the economy in any other way.

In its review of the economy, the IFAC broadly endorsed government policy and said the country was on course to meet the important target of reducing the fiscal deficit below 3% by the end of next year.

But it criticised the Government for not implementing €2bn of cuts in last month’s budget.

“The pressures that led to mistakes in the past are building again,” said the head of IFAC, Prof John McHale, adding that Ireland was still a high-debt country with huge risks to growth. “The opportunity to move the country’s finances into a zone of safety was missed.”

He said “he didn’t feel” that IFAC had been ignored by the Government.

In its last review of the economy, the council, which was set up on the recommendation of the troika to provide independent fiscal advice to the Government, advised Michael Noonan, the finance minister, to introduce €2bn in consolidation measures on October 14.

Mr Noonan went for a neutral budget.

Prof McHale said he “understands politics can pull [the Government] in a different direction”. The role of IFAC was to act as a counterweight in the public policy debate, he added.

IFAC criticised the Government for not producing a well-specified plan for the public finances beyond next year. Published tax and spending projections for 2015 on do not take into account commitments by the Government to reduce the tax burden and demographic pressures that will force spending increases.

There is also a huge risk that, if Irish Water does not stay off the Government’s balance sheet, then its borrowing will be added to the fiscal deficit, which will require added austerity measures over the next few years, said IFAC.

It said Budget 2015 was a “missed opportunity” to move the public finances “more decisively into a zone of safety”.

It highlighted the discrepancy between the Coalition’s promises of tax cuts over the next three years and the figures in its projections: “Budget 2015 was marked by an absence of a well-specified plan for the public finances beyond 2015. Published tax revenue projections assume no change in policy despite budget commitments to lower taxes in the coming years.”