INCREMENTAL BUDGET MODEL 2012

Evaluate the Incremental Budget Model With Reference To The 2012

Evaluate the Incremental Budget Model With Reference To The 2012

Introduction

Ireland has reached a key stage in its recovery from the unprecedented economic crisis that has been ongoing since 2008. The measures taken by the previous Fianna Fáil / Green party Government since the crisis emerged were wide in scope and substantial in nature. On the public finances, a cumulative €21bn in expenditure and taxation measures was put into effect.

While undoubtedly painful for all sections of society, it is important to recognise that had these measures not been taken, the implied, uncorrected deficit would this year have reached an utterly unsustainable 23% of GDP. While the measures taken have unquestionably had a negative impact on living stands, postponing action would have led to greater burdens in the future, particularly on those who have least capacity to bear them.

Discussion By the end of 2011, around two-thirds of the required measures on the fiscal side will have already been completed. The Financial Support Programme is conditional on Ireland adhering to a programme of fiscal consolidation and a number of other economic reforms. However, we are now on a path which sets us apart from the other EU / IMF programme countries. An anticipated outturn in 2011 of modest economic growth based on a rise in net exports and a current account surplus represent welcome developments.

In framing the 2012 budget, the difficult challenge for the Government is to introduce measures that narrow the budget deficit in line with the agreed target of 8.6% of GDP while at the same time maximising employment and economic growth. Innovative policy responses that encourage investment in labour intensive areas such as home improvements and energy retrofitting can create a significant number of jobs and boost the overall economy.

We concur with the overall adjustment figure of €3.8 billion in 2012, though the composition of the adjustment must be achieved in a way that maximises job retention / creation. In this regard, we propose a smaller cut in the capital budget with a corresponding larger decrease in current expenditure.

Given the importance of reaching the 8.6% target as a milestone towards the reduction of the deficit to 3% by 2015, the Government should be willing to take necessary additional measures if the mid-year Exchequer returns indicate that the target may not be met. The Fiscal Council can play an important role in monitoring progress through the year and we suggest that they appear before the Oireachtas Finance Committee at least twice during 2012.

There are significant downside risks that could impede Ireland's recovery. These are further highlighted in today's ESRI Quarterly Economic Bulletin which predicts GDP growth of just 0.9% in 2012 with GNP forecast to contract by 0.3%. We are concerned that the Government's forecast of GDP growth of 1.6% in 2012 is already looking optimistic.

Our key proposals are:

Taxation

The Government should not proceed with the proposed 2% VAT increase at this ...