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Economic Assessments and Forecasts
The OECD and the Irish Fiscal Advisory Council have both published reports outlining the significant challenges ahead for Ireland and Europe in terms of economic recovery. The publication of these reports reinforces the need for long-term planning to be at the heart of policy making in order to deliver the services and infrastructure that will be required in the years ahead.
OECD Outlook 2014
The OECD Outlook 2014 notes that Ireland, as one of a number of countries who are currently in the EDP (excessive deficit procedure) and thus has no fiscal space if it is meet the nominal deficit rules by the agreed deadline. The report states that Ireland might appear to have some fiscal space as it has been over-achieving its nominal targets, but given its high debt level, it has no room to ease its structural adjustment efforts if it is to comply with the transition rule after it leaves the EDP.
The report shows vulnerable euro area countries (Greece, Ireland, Italy, Portugal, Spain, and Slovenia) score weakly on several indicators, including low growth, and high unemployment, nonperforming loans, public debt and deficit, and government bond yields. In many of these countries external liabilities exhibit a systematic debt bias.
The report also highlights that countries with a large financial sector (including Denmark, Iceland, Ireland, Luxembourg, the Netherlands, Switzerland and the United Kingdom.– as, for example, proxied by the size of financial corporations’ gross debt relative to GDP– tend to exhibit the largest financial-accounts-related risks to financial stability.
Irish Fiscal Advisory Council
The Irish Fiscal Advisory Council (IFAC) has just published its Fiscal Assessment Report. The IFAC note that Budget 2015 did not include a well-specified plan for the public finances despite the fact that credible medium-term plans for the public finances are crucial to avoiding pro-cyclical fiscal policy and protecting fiscal sustainability.
The report also notes that published tax revenue projections assume no change in policy in the medium term, despite Budget commitments to cut taxes in the coming years. It highlights that he CER 2015-2017 does not adequately address how well-known expenditure pressures will be accommodated in the coming years. This a particular problem for departments such as Health and Education, reporting large demand pressures over 2015 to 2017, and given the current very low level of capital spending.
Significantly, the report notes that the recent sharp acceleration in real GDP growth may be flattered by contract manufacturing activities. This activity is unlikely to be associated with any significant domestic employment and its contribution to the tax base is unclear. Its impact also increases the degree of uncertainty around projections for net exports. The IFAC report concludes that while the economy appears to have turned a corner of late, chances that growth may disappoint remain high. The discussion in Budget 2015 is dominated by downside macroeconomic risks.