Pro-cyclical budget ‘likely to increase economic volatility’
The stimulus boost provided by Budget 2016 is likely to increase economic volatility, ratings agency Fitch has said.
The ratings giant nonetheless said the Budget was consistent with improving finances, arguing that the strong fiscal performance since the start of this year had made room for some giveaways.
And it said some stimulus ahead of an election was not that surprising. But the agency did warn that the Budget was “pro-cyclical” and therefore likely to increase economic volatility.
A pro-cyclical policy in Budget terms entails increased spending and tax cuts in times of economic growth, and less government spending and increased taxes in times of decline.
As a whole, Fitch’s assessment has been generally positive.
“Some fiscal easing ahead of general elections, which must be held by 8 April next year, is not surprising. It does not change our expectation of further budget deficit narrowing, with Ireland exiting the excessive deficit procedure (EDP) in 2016, and debt-to-GDP continuing to decline, albeit from a very high level,” Fitch said in a note.
“The sovereign’s fiscal credibility has been underlined by its meeting of the original EDP deadline set nearly five years ago,” it added. Fitch said that it assumed the next Irish government would remain broadly compliant with the EU and national fiscal rules.
“This will remain an important driver of debt dynamics, as it is not clear how long Ireland will maintain the very high growth rates of this year. The large role that economic recovery has played in improving fiscal performance is indicated by the fact that the structural deficit has narrowed significantly less than the headline deficit,” the agency said.
