Ireland’s Budget for the following calendar year is now presented in early October, which increases the probability of forecast errors. Such errors are a feature of any fiscal projections but are notable in the Irish context; the median difference between the forecast Exchequer balance and the outturn over the past fifteen years is €2.5bn. This is not to put any blame on the Department of Finance or to suggest any inherent bias ( the sample is evenly split between overshoots and undershoots relative to target), but rather to highlight that errors are highly likely in an economy as volatile and open as that of Ireland, and that unexpected events can and often do materialize.
Take the 2014 budget. The fiscal projections were predicated on real economic growth of 2% , including a pick up in consumer spending and a very modest contribution from the external sector, with exports forecast to grow by 1.9%. It now seems likely that the economy grew by 5% last year , with exports growing at a double digit pace. Moreover, consumer spending growth was probably less than 1% while inflation has been much lower than forecast, although the labour market has been much firmer, with the unemployment rate averaging around 11.5% against the projected 12.4%.
The Budget arithmetic had anyway changed by the beginning of the calendar year, with debt service costs then seen to be €400mn lower than initially envisaged and revenue boosted by the full amount of receipts from the sale of the national lottery (instead of half).As a result of these factors and other changes the projected 2014 Exchequer deficit was revised down in April to €8.7bn from the original Budget target of €9.6bn
It also became clear early in the year that tax receipts were running ahead of profile and that trend continued over the course of 2014, with a final outturn €1.2bn above target; tax revenue grew by 9.2% instead of the envisaged 6%. All tax headings came in above expectations with the exception of the Local Property Tax , including a €400mn overshoot in VAT, €234mn from Corporation tax and in excess of €200mn from Stamp duty, including monies from the pension levy.
That tax oveshoot would have resulted in a deficit below €7.5bn, all else equal, but in the event the Government chose to use some of the largesse to increase spending. That decision was taken relatively late in the year as expenditure has been on or below target for much of 2014, but at end- December emerged €840mn or 2% above profile. Most of this additional outlay went on Health, which begs the question as to the realism of the original target spend for that Department.
As a consequence the Exchequer deficit for 2014 emerged at €8.2bn, above what might have been achieved but well below the original target of €9.6bn and the lowest deficit since 2007. The NTMA funded the shortfall by borrowing a broadly similar amount and used existing cash balances (i.e. previous overfunding) to repay €8.2bn to the IMF.
So one might say it turned out all right in the end but somewhat different from that envisaged when the Budget was originally delivered, an all too common experience for the Irish exchequer and one which implies it would be fruitless for Ireland to try and fine-tune economic growth via fiscal policy, even if that were possible given euro rules. On final point: the Government is now using the Irish semi-state companies (particularly the utilities) in a more aggressive way to raise revenue, with dividends received amounting to €475mn in 2014, against €264mn in 2013 and €112mn in 2012. The ESB alone ( and therefore its customers) have has contributed €840mn since 2008.