Michael Noonan has to decide the extent of cuts in Budget 2015
By Business Editor David Murphy
There is an interesting dynamic unfolding as the lobby groups bombard the Department of Finance with their demands regarding the upcoming Budget.
In some respects, there is a race to the bottom to recommend the smallest amount which might be needed in extra taxes and spending cuts.
Originally the Finance Minister Michael Noonan pencilled in raising €2bn.
It is much smaller than previous financial packages, but still painful after a continuous stream of austerity since 2008.
The Irish Fiscal Advisory Council, the IMF and the European Commission want Mr Noonan to stick with the original plan.
But the latest figures from the Central Statistics Office for economic growth give commentators reasonable justification to argue for a less severe undertaking.
The latest data is surprisingly strong. It shows economic growth as measured by GDP growing by 2.7% in the first three months of this year.
But there is a catch.
The quarterly figures are notoriously volatile and subject to substantial revisions. In fact the CSO revised upwards its estimate for growth for the whole of 2013 from drop of 0.3% to growth of 0.2%.
Separately, the Government collected €500m more in tax than it had expected during the first six months of this year.
A lot of the data about conditions on ground, such as car sales, are improving. But many consumers don’t feel financially better off because few have had wage increases and taxes are still high. And let’s not forget unemployment is still 11.6% and mortgage arrears remain elevated.
The odd thing about economics is that is can be very difficult to say with certainty what is happening now. And it is close to impossible to say what will happen in the future as this blog has discussed before.
For that reason it is worth looking long and hard before accepting the argument that Ireland is experiencing a burst of growth.
The employers group IBEC thinks it is.
It has suggested that instead of a €2bn budgetary adjustment the Government need only raise a tenth of that amount. It has based that projection on the better the expected economic growth figures for the first quarter of the year.
IBEC’s argument is that if Ireland continues with austerity it could stifle the emerging economic growth.
Its CEO Danny McCoy, a former economist, argues the structural deficit has been dealt with and the upturn in the economic cycle will bring the public finances back into line – in other words hitting people with significant additional taxes and spending cuts is not warranted.
If Mr McCoy is wrong, however, the risks are big and the Government could be jolted back into austerity because it stopped too early.
Michael Noonan would be wise to take the advice from the Economic and Social Research Institute and wait until the September tax figures before committing to a final Budget.
But with a reloaded Cabinet and the Labour Party still reeling from the fall out of the Local and European elections, holding a cautious line may not be so easy.
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