Two-thirds of the way through the financial year the performance of the Irish economy has surpassed expectations – both of the Government and of economic forecasters generally. The rate of growth remains stronger than anticipated, the public finances continue to improve, and consumer confidence is slowly rising. For the Government, introducing a budget next month and facing a general election within six months, the economic outlook could hardly be better. However, the Coalition’s political prospects – as measured by the polls – are far less encouraging.
The exchequer returns for August show tax revenue rising; €1.4 billion ahead of target year-to-date. The improvement has been helped by higher income tax receipts as employment rises, average weekly earnings increase, and corporation tax revenue soars; 38 per cent above target so far this year. Spending remains broadly under control, with overruns in health and welfare spending offset by reductions in other areas. The lower cost of debt interest payments, amounting to €396 million, has meant further savings. This follows the State's refinancing of International Monetary Fund (IMF) loans earlier this year. In consequence, the budget deficit for 2015 may well drop below 2 per cent of GDP, lower than the Government had forecast in its spring statement.
Optimism about prospects for the Irish economy while well-merited, needs nevertheless to be tempered with some caution. The IMF has this week warned about risks to growth in the global economy. And the fund has urged the world's major central banks not to raise interest rates, as may well happen in the US later this month. The IMF has also asked that these banks, including the European Central Bank (ECB), be ready to provide further monetary stimulus should that be needed. For the ECB it would mean expanding its programme of quantitative easing, by creating more euros to buy more government bonds in an effort to boost economic activity. ECB president, Mario Draghi, speaking after the governing council meeting yesterday, did not rule that out. Ireland, as a small open economy, is clearly vulnerable to a slowdown in world growth.
The Government has already signalled tax cuts and spending increases of up to €1.5 billion in next month's budget. Its budget plans have been criticised both by the Irish Fiscal Advisory Council and the European Commission as too ambitious, with both recommending a more cautious approach. The Government, having raised public expectations of what Budget 2016 – the last before a general election – will deliver, cannot afford to disappoint. However, it would be well advised not to exceed giveaway limits it has set and, should a deteriorating international economic environment require it, stand ready to adjust, regardless of the electoral cost.