The following OECD assessment and recommendations summarise Chapter 8 of the Economic Survey of Ireland 2006 published on 2 March 2006.
The fiscal position is healthy. The government savings rate (current revenue less current expenditure) is one of the highest in the OECD (being around 4% of GDP last year). After taking account of the high rate of public investment due to the infrastructure programme, the overall government accounts showed an estimated surplus of ½ per cent of national income in 2005. Gross debt is low (33% of GDP in 2005), long-term ageing-related spending pressures may be less severe than in many other countries and assets are being accumulated in a pension reserve fund. However, the government has budgeted for a deficit of ¾ per cent of GNI in 2006 through 2008, thus providing some untimely fiscal stimulus to activity. And some sizeable long-term social expenditure commitments are being locked in at what could be the peak of a revenue cycle. Moreover, there are some large downside risks to fiscal policy.
Fiscal performance has been sound
General government sector
1. OECD forecasts; current revenue less current expenditure. Ireland in per cent of GNP.
Source: OECD (2005), Economic Outlook 78 database, Department of Finance, Budget 2006 and OECD calculations.
As noted above, the main domestic risk is the housing market. But even if house prices level out, there are macroeconomic and fiscal risks from a decline in residential construction, which currently accounts for 9% of GNP. The rate of house building will need to fall substantially to return to sustainable levels. Most forecasters predict that this adjustment will be gradual. A sharper decline would put a serious dent in the growth rate though it would be unlikely to lead to an outright recession. Overall, the forces that will drive activity in the medium term – immigration, productivity, female participation, foreign investment, house prices – are so powerful and difficult to predict that the outcome for growth could be substantially different from the central forecast. For all these reasons, a prudent approach to fiscal policy would be to leave sufficient room for manoeuvre – i.e. to plan for the worst but hope for the best. In practice, this means returning to balance or running a small surplus.
Is the fiscal framework up to the task?
Ireland has elements of a medium-term fiscal framework, especially with its rolling five-year capital expenditure envelope and its ten-year transport plan. Although the budget process has some top-down aspects, they need to be given more prominence relative to the bottom-up negotiation process. Ireland should take advantage of its current strong growth phase to strengthen the fiscal framework in order to prepare for negative fiscal shocks and to deal with them if they were to occur. Moving to a fully-fledged top-down budgeting process would help expenditure planning and control while a medium-term fiscal framework, as is in place for the multi-year capital envelopes, would give greater stability to policy and planning for other spending areas and would reduce the chances of repeating the sort of pro-cyclical spending that occurred earlier this decade.
The search for productivity improvements should also extend to the public sector. While Ireland is modernising its civil service, it needs to move faster to catch up with best practice. One requirement is to shift the focus of the budget and public management towards outputs instead of inputs and the government has announced that individual ministers will publish an annual statement on departmental outputs and objectives from 2007, while also reporting outturns from 2008. Hiring and promotion practices need to be modernised by moving to fully competitive and merit-based promotion and giving department managers greater freedom to recruit their own staff. Increasing demands on the public purse mean that the evaluation programme and value-for-money assessments will need to be improved. The expenditure review programme has had little success so far, with little impact on budget decisions. Recent changes to the process should improve things, however. The government has decided to phase out several property-related tax reliefs and to cap the overall amount of tax reliefs granted to an individual. Remaining tax reliefs should remain under scrutiny and be removed unless they can be shown to be worthwhile.
Return to the Economic Survey of Ireland 2006
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For further information please contact the Ireland Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Rae and Boris Cournède under the supervision of Peter Hoeller.