An initial growth forecast for 2016 from the Economic and Social Research Institute (ESRI) helps set the fiscal scene for the election campaign to come. Ahead of a blitz of political promises, the think-tank’s new assessment provides perspective.
The Government has been proceeding on the basis that the State will balance the books by 2018, with borrowing increasing in both 2016 and 2017 to finance continued deficits. Still, the ESRI believes a balanced budget could well come within grasp next year. Thanks to promised tax cuts and a mooted review of public pay, it is exceedingly difficult to imagine the Coalition seizing that opportunity in the October budget. Thus the body’s assessment demonstrates the importance of political choices in the run-up to the election and its aftermath.
Past errors
At issue, ultimately, is whether Irish leaders can muster the political courage to avoid overheating an expanding but highly-indebted economy. In the ESRI assessment, this is a challenge which is coming rapidly into view. Far from the promise of giveaway budgets in years to come, as recovery gathers strength, the body believes budget surpluses will be required in 2017 and 2018 to maintain order in the economy and prevent a repeat of past errors.
Ireland’s gross domestic product (GDP)rose 4.8 per cent in 2014 and gross national product (GNP) rose 5.2 per cent, the swiftest growth in the EU. The ESRI anticipates further progress this year, with a forecast of 4.4 per cent GDP growth for 2015 and 4.1 per cent GNP growth. Its first stab at a 2016 forecast suggests GDP expands by 3.7 per cent and GNP by 3.5 per cent.
This prediction assumes the Government runs a neutral budget next autumn, with no net change in taxation or expenditure. With the election due by the spring of next year, that is not going to happen. The Government plans another expansionary budget in 2016 to help fund tax cuts and some spending increases, but the scope and scale will remain unquantified until mid-October.
Still, the ESRI casts light over what happens in a no-change scenario. In the body’s assessment, the budget deficit in 2014 (3.7 per cent of GDP) would decline this year to 2.3 per cent and drop further to 0.3 per cent in 2016. Although a 0.3 per cent deficit would be as near to zero as makes no difference, the Coalition will go higher than that. Current speculation points to a deficit which is likely to come somewhat below 1 per cent of economic output, with growth mitigating the impact on the public finances of the expansionary budget.
The Government will argue that such a course makes sense as it strives to stimulate activity and boost employment.However, the ESRI makes the case that the Irish economy is already likely to come close to its potential level at the end of 2015. This means, in sum, that efforts will soon be required at political level to prevent the economy from overboiling.
Financial crisis
“If the economy continues to grow significantly in 2016, budgetary policy will play an important role in moderating economic activity and ensuring that there is no repeat of the destabilising pro-cyclical policy evident in the run-up to to financial crisis of 2007/’08,” says the ESRI commentary.
“This may require, for example, that budgetary policy targets fiscal surpluses in 2017 and 2018.”
Although this may not please politicians as they vie for advantage in advance of the election, it is as well to take account of the economic challenge which remains to be overcome. As the Spring Economic Commentary makes clear, it is only towards the end of 2016 that Ireland's economy is forecast to return to the pre-crisis peaks reached in 2007. This would happen only against the backdrop of a greatly increased national debt, which stood at 109.6 per cent of GDP on a general government basis at the end 2014 and is forecast in the current year to come in at 106.5 per cent. Although Ireland's net debt position is more favourable, the State will be obliged for years to come to achieve meaningful debt reductions.
This is the immutable backdrop against which election promises will be made – and put to the test in economic real-time.
