We’re still a while off publication of election manifestos, but Taoiseach Enda Kenny is on record saying he will target a balanced budget by 2018 if he returns to power early next year. What does that mean?
The backdrop is crucial. The economy is expanding rapidly and the Budget 2016 was predicated on the achievement of a deficit in the order of 1.2 per cent of gross domestic product next year. This might yet prove cautious.
A set of stellar tax returns for October – and whispers that money is gushing in again this month – suggest the opening position in January will be a good deal better than foreseen on budget day.
Although the 2016 plan assumed the deficit at the end of this year would be 2.1 per cent of GDP, informed observers believe the eventual figure could well dip below 2 per cent, with a consequent improvement in likely deficit for 2016. The deficit next year may now come closer to 1 per cent.
True, scope is severely limited under new fiscal rules to expand the budget. Still, the plan to eliminate the deficit three years hence reflects the strategy of the Coalition parties to maintain incremental income tax cuts while adding to expenditure.
The 2018 target may also be a movable feast. Indeed, some close observers the possibility is opening up to balance the books in 2017.
That assumes a continuation of economic growth and growth in employment: Mr Kenny expects “at least another 50,000” new jobs next year.
At the same time, there’s no surprise that the Government would take its time to scrap the deficit. There’s an election on the way after all. It will be the same, more or less, for each party. The target date for the elimination of the deficit in Sinn Féin’s proposed vote-transfer pact with left parties and Independents is 2020.
IMF support
In terms of the 2018 target, however, the Government has received a tacit signal of support from the new International Monetary Fund mission chief to Ireland, Zuzana Murgasova.
“Aiming for structural fiscal balance within three years is about right, but fiscal measures should be more supportive of growth potential,” she said at the end of a postbailout inspection last week in Dublin.
When it comes to election rhetoric, such remarks are not without significance. Budgets may be judged these days through the prism of mindbending fiscal rules, but they are so convoluted as to obscure clarity in discussion.
In that context, it might be far easier to argue that the IMF reckons the three-year target is “about right”. That’s not to say there’s an overwhelming endorsement from the crowd in Washington. Ms Murgasova took care to warn that the maintenance of fiscal discipline was critical.
It’s the same with the European Commission, which found this week that the budget was “broadly compliant” with the rules. That was enough for Dublin, although the commission said in its formal opinion that using higher revenues than expected for permanent spending was “not in line” with policy recommendations. The latter comment did not appear in the commission’s general communication on euro zone budgets, so the core message from Brussels was clear enough.
When it comes to deficits, it is the practice of external agencies to seek faster cuts from governments. In his penultimate speech as Governor of the Central Bank, however, Patrick Honohan said in London this week that the adjustment path deployed during the bailout “was close to the best available to Ireland”.
Prof Honohan said recovery might have consolidated somewhat faster if Dublin moved a little more ahead of the curve, but “there was probably not much in it”.
Sound
In its review of the bailout last January, the IMF said the balance of the programme was sound. However, it said a case could be made for a moderately stronger fiscal adjustment once the economy stabilised and suggested savings made from interest-rate cuts on the European loans might have been deployed for debt reduction near the end of the rescue. (Cumulative savings reached €4.4 billion between 2011-2013.)
The Government said such observations were “misplaced and redundant” in its response to the IMF document.
“The reductions in the interest costs for our EU loans were achieved following delicate negotiations with our European partners, which were, incidentally, not reflected in similar reductions for the IMF loans.”
