THE GOVERNMENT’S official budget think-tank has warned that Ireland may need a ‘mini-Budget’ later in this year, cutting spending and increasing taxes by up to €400 million, as economic growth falls short of initial expectations.
The Irish Fiscal Advisory Council’s assessment report for April, launched this morning, notes that the Budget’s expectations – that the Irish economy would grow by 1.3 per cent in 2012 – have been undercut by other forecasts.
In its report, the council says it “shares the emerging consensus that growth in 2012 will now be lower than was envisaged in Budget 2012″, though it added that it was difficult to tell, for now, how much the any budget shortfall might be.
Compared to the Budget’s forecast of 1.3 per cent, the Central Bank expects growth of 0.5 per cent, as do the European Commission and the International Monetary Fund.
The OECD suggests growth of 1.0 per cent – though its forecast was made in November, and is the oldest of all the forecasts – while the ESRI suggests growth of 0.9 per cent.
“Using Budget 2012 projections as a benchmark and assuming zero buffers, Council simulations indicate than additional discretionary adjustment of €0.4 billion would be required to achieve the [deficit] target of 8.6 per cent of GDP for 2012,” the report says.
It adds, however, that these “buffers” could mean that while an extra ‘mini-Budget’ could be needed to implement these adjustments, a full €400 million of cuts and tax increases may not be needed for now.
Because higher expectations for growth lead to an overstatement in tax incomes, though, the council says Ireland should introduce an extra €2.8 billion in budget adjustments over the next three years, in order to ensure Ireland hits its deficit target of 3 per cent of GDP by 2015.
The next three Budgets had previously been expected to make €12.4 billion of combined tax increases and spending cuts, in order to meet the EU’s target by 2015, but the Council’s suggestion would bring this to €15.6 billion.
The report adds that there is “an unusually high degree of uncertainty surrounding Irish growth prospects”, this was largely due to external factors such as question marks over the economic recoveries in Europe and the United States.
However, the behavioural dynamics – of households, investors and financial institutions – in the ‘post-bubble’ Irish economy are quite some way from being understood at this stage.
Some time is likely to be required before the implications of these elements can be fully factored into a more solidly based assessment.
A further indication on whether a mini-Budget could be needed will come later today, when the government publishes its Exchequer returns for March.
The Department of Finance is expected to publish an interim document later this month in which it will revise its targets for economic growth, which could then include confirmation that a secondary Budget could be needed.