“The role of the Council is to independently assess, and comment publicly on, whether the Government is meeting its own stated budgetary targets and objectives. It assesses the appropriateness and soundness of the Government’s macroeconomic projections, budgetary projections and fiscal stance. The Council will also examine the extent of compliance with legislated fiscal rules.” The Irish Fiscal Advisory Council website
Yesterday, the five members of the Irish Fiscal Advisory Council – John McHale, Sebastian Barnes, Alan Barrett, Donal Donovan and Roisin O’Sullivan – should have handed in their notices of resignation. For the second year running, the Government yesterday produced an economic outlook which has again “noted” the advice and recommendations of the Council, and ignored it. We don’t need a special Council to provide economic assessments to Government and then have those assessments ignored – any Tom, Dick and Harry or Brian, Karl and Constantin can do that.
The fundamental principle behind an independent Council is to separate neutral economics from politics. At a detailed level, it’s to stop the Charlie McCreevy “if we have it, we’ll spend it” attitude or eve-of-election giveaway budgets traditionally used in this State to buy votes.
Yesterday, the Department of Finance published its pre-budget economic outlook (see above summary). It’s a week late and whilst forecasts come and go, some of the specific forecasts raised eyebrows. Just a month ago, the Central Bank of Ireland forecast 2012 real GDP at 0.5% and that the domestic economy represented by GNP contracting in 2012 by 0.4% (see forecast summary below).
Last week the European Commission issued its Autumn forecast which included 2012 GDP only and its forecast was identical to the Central Bank’s at 0.4%, the European Commission doesn’t forecast GNP (see extract below). Yesterday, the Department of Finance forecast 2012 GDP at 0.9% and real GNP to increase by 0.4%. The difference between the Central Bank’s and Department’s GNP forecast is striking.
It should be stressed that forecasts do come and go – circumstances change and unforeseen events are commonplace and even educated forecasts can be way off target. But when one forecast is at odds with another, it’s worth asking why and when one forecast is at odds with consensus forecasts, it’s negligent not to ask why. Why is the Department’s forecast of GDP in 2012 twice that of the consensus, albeit the difference is just 0.4/0.5%. But more starkly, there is little evidence from yesterday’s publication to show why the GNP forecast in particular should be so buoyant – unemployment remains at 14.8% equating to about 310,000 and the seasonally adjusted Live Register remains stubbornly at around 430,000, the last three months Exchequer Statements indicate a deterioration in our financial position which would be far worse were it not for underspending on the capital programme.
So to summarise yesterday’s Departmental forecast, 2012 is going to be better than expected but there is some downgrade to 2013 and 2014 but we are still confident of meeting the annual targets in the Memorandum of Understanding with the so-called bailout Troika. But with respect to the Irish Fiscal Advisory Council which produced its Fiscal Assessment Report in September 2012, the Department yesterday noted the recommendation by the Council to accelerate the budget adjustments from 2014 in the context of noting the risks and history of overly-positive forecasting by the Department. And the Department has, as it did in 2011, ignored the position of the Council.
The Council doesn’t produce its own estimates of GDP and GNP. It has assessed the “fiscal stance” of the Government and has sought faster budget adjustments. It has assessed the “soundness” of the Government’s projections and has concluded they are overly-positive. This is the meat of what the Council does, and the Government has ignored its assessment of its “fiscal stance” and has produced a forecast of GDP and particularly GNP growth in 2012 which is higher in the case of the former, and significantly higher in the case of the latter, than most other forecasters .
So what do we want or need a Fiscal Advisory Council for? To claim some fig leaf of politically independent economic oversight at national level? And then to ignore what the Council says?
Is this what the five members of the Council signed up for?