Irish Budget could now add up to €1bn in stimulus to economy

In April, the Irish Government expected that another round of tax increases and spending reductions would be required to get the 2015 Budget deficit below the 3% target set by the EU, with €2bn seen as the adjustment figure. That would have taken the cumulative adjustment to €32bn since the initial retrenchment started in 2008 but in the event it now appears that such is the transformed economic outlook that the 2015 Budget ( to be delivered on Tuesday Oct 14) will now provide a stimulus to the economy, which may amount to up to €1bn, depending on how much leeway the Minister for Finance chooses relative to the 3% target.

A key factor behind this remarkable change in the budgetary position is the performance of the economy over the first half of 2014. That has prompted the Department of Finance to revise up its real growth forecast for this year and next; 4.7% growth is now envisaged in 2014, from an initial 2%, with the economy forecast to expand by 3.6% in 2015. Nominal GDP is also now seen as being much higher than originally  projected, with  a figure  of €193bn  forecast by the Department , an extraordinary  €19bn above that forecast six months ago. A stronger economy implies a lower cash deficit, via reduced welfare spending and higher tax receipts, with a higher nominal GDP figure also helping to lower the fiscal and debt ratios.

It has been apparent for some time that this year’s deficit would be much lower than initially forecast and the Government’s ‘Estimates of Receipts and Expenditure’, published last night, predicts a 2014 General Government deficit (GGD) of  €6.9bn, which is €1.2bn below that envisaged in April. The deficit ratio is also much lower, at 3.7% of GDP instead of 4.8%. In fact that outturn, if it materializes, would be a little worse than some had expected; revenue is projected to come in €1.8bn ahead of the April forecast, including a €1bn overshoot in tax receipts, but spending is now forecast to be €800mn above the initial target, including over €500mn in voted expenditure, perhaps indicating that the current Health overspend will not be corrected.

Voted  current spending is projected to fall in 2015, by €1.3bn from the 2014 outturn, but again this hides a significant change in plan, as next year’s figure is almost €1bn above that envisaged last April . As a consequence the GGD  in 2015 is only €0.5bn below that projected in April, coming in at €4.7bn. This is 2.4% of forecast GDP and hence well below the 3% target, although had the initial spending plans been adhered to the deficit would be substantially  below 2%.

The figures are on an unchanged policy basis and so the Minister has significant leeway now to raise spending and give some tax relief, with the scale of any largess dependent on his final target. In addition, he may announce some ‘savings’, so increasing the scope for a potential stimulus, including lower debt interest on foot of some repayment of the IMF loan, refinanced at cheaper market rates. That might amount to say €300mn. so reducing the pre-Budget deficit further, to €4.4bn. Consequently a final target of say, , €5.4bn,, or 2.8% of GDP, would imply a spending and tax package of around €1bn, not counting any tax buoyancy on foot of the stimulus  or positive impact on GDP.

The global economic outlook looks cloudier than it did a few months ago , with the euro area particularly weak, which adds a greater degree of uncertainty than usual to any fiscal forecast. The Minister may  err on the side of caution and go for a lower forecast deficit but the difference now is that he has far more options than envisaged earlier in the year and certainly far more than in recent budgets. A deficit of 2.8% would also mean a strong primary surplus (the budget balance less interest payments).