Thread by @seamuscoffey

The latest report from @IFAC_ie was published this morning. There is a huge amount of analysis in it and is available from: fiscalcouncil.ie/fiscal-assessm…

Here’s a short thread with some selected highlights.

The Irish economy continues to perform very well with employment and adjusted measures of domestic demand maintaining strong growth. The economy is now operating close to capacity.

With the unemployment rate dropping below 5%, the "labour market and prices" element of @IFAC’s heat map is beginning to provide signals of possible overheating pressures emerging.

On the fiscal side, the most notable feature has been the acceleration in the growth of expenditure in recent years. In real terms (the chart is nominal) spending growth rates are approaching the levels of the mid-2000s.

In 2018, the growth rate of spending excluding debt interest exceeded the growth rate of revenue, with revenue boosted by the temporarily high cyclical growth rates and another €2 billion of unforeseen Corporation Tax.

In 2018, Corporation Tax provided a record share of Exchequer Tax revenues generating close to 1 in 5 of all Exchequer tax raised. A return to the "normal" share from Corporation Tax would represent a significant revenue loss for the government.

Even with these significant tailwinds, the government’s primary balance has been unchanged since 2015 and can be shown to have deteriorated in that period once the economic cycle is accounted for.

A significant reason for this has been the repeated instances of within-year unplanned increases in expenditure most notably in the health area. These overruns are cumulative and long lasting.

The government’s latest projections in SPU2019 show a fiscal stance that should be delivered on. This means no further loosening of the stance for 2019, while the €2.8 billion of budget changes for 2020 implied by the SPU projections should be adhered to.

This stance would be appropriate given the risks faced by the public finances, most notably the volatility of Corporation Tax revenues and the non-zero, and possibly increasing, risk of a hard Brexit, as well as the failure to deliver on fiscal plans in recent years.

It would also help to alleviate the pro-cyclicality which has been a feature of Irish fiscal policy since the mid-1970s. Counter-cyclical policy would have the majority of data points in the bottom-left and top-right quadrants of this chart. These quadrants are near empty. /end