Fiscal watchdog chews over budgetary policies

28 Nov 2018

The Irish Fiscal Advisory Council (IFAC), the statutory body established as part of a reform of Ireland's budgetary architecture in 2011, has today published its latest Fiscal Assessment Report (FAR).

This is a twice yearly publication, with the latest edition assessing October’s Budget and recent fiscal plans through the lens of the government’s overall budgetary stance, the forecasts underpinning same, and compliance with fiscal rules. 

The report finds that economic output is close to its potential “and the short-term outlook remains strong. Yet a slowdown in coming years is inevitable and there are numerous risks”. Included in those risks are: (i) the potential for the recovery in housebuilding to overshoot; (ii) a messier than anticipated fallout from Brexit; (iii) the global rise in protectionism; and (iv) possible future changes in the international tax environment. 

The growth in State spending is a concern for IFAC, which notes that “underlying improvements in the Budget balance have stalled since 2015, despite the favourable environment”, as discretionary expenditure has ramped up in-line with government revenues, the latter having been inflated by cyclical (and temporary) factors, which “suggests that the underlying budgetary position has deteriorated”. Apart from Budget Day giveaways on the spending side, IFAC notes poor expenditure management in a number of departments, notably health. 

May permits amendments to Brexit deal: 

UK PM, Theresa May, has given into demands by the UK Parliament to allow them to make changes to her Brexit Withdrawal Agreement ahead of the ‘meaningful vote’ on December 11th. It appears that it was the UK government’s plan to block amendments to the plan during the legislation process but anonymous sources have now said that due to relentless pressure from various elements of parliament, the government has done a volte face on this and will now permit changes to the plan. DUP leader, Arlene Foster, was vocal yesterday saying that “as far as I can see, this (deal) is not going through parliament”. The “Meaningful Vote” debate kicks off on December 4th with five full days of (eight hour) debates, culminating in the final vote on December 11th. Sterling struggled yesterday following Donald Trump’s comments about a trade deal with the US being impossible if the UK are in a customs union with the EU.

Brexit ‘no deal’ impact

The UK Treasury are likely to report today that a ‘no deal’ outcome would leave the UK around £150bn worse off, versus Theresa May’s own plan which would see £40bn sent to Brussels. These forecasts are coming under increased scrutiny over their credibility with former Brexit Secretary Dominic Raab accusing the PM of ‘rehashing project fear’. The report should contain information about the impact of the various different Brexit scenarios including a comparison to remaining in the EU. There is a separate BoE scenario analysis that will be published around 4.30pm today so there will no doubt be headlines on the back of this release also. With so much uncertainty over everything Brexit, the one thing that remains as clear as day is how divided politicians, and the nation, remain about solving it.

Trump slams Jerome Powell…again

US President Donald Trump continued his staunch criticism of Federal Reserve Chairman Jerome Powell in an interview with The Washington Post released yesterday. Over the last number of months, Powell and the Fed have come under fire by the President following successive interest rate hikes which, in Trump’s view, were damaging the US economy. Trump has also criticised the Fed’s policy as rising interest rates are making it more expensive for the Trump administration to finance its surging fiscal deficits. Trump told the newspaper, “so far, I’m not even a little bit happy with my selection of Jay…not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off-base with what they’re doing”. With Powell due to speak today at the Economic Club of New York, it will be interesting to note if the Fed Chair alludes to the aforementioned disapproval. 

Economic Forecast

12.05 EC ECB’s Coeure speaks
13.00 EC ECB’s Guindos speaks
13.30 US GDP
15.20 EC ECB’s Praet speaks
16.45 UK BoE’s Carney speaks