Pro-cyclical policy risky, says fiscal council chair

Pro-cyclical policy, a lack of proper midterm economic planning and high levels of debt are the main risk factors facing the Government, according to the Fiscal Advisory Council (IFAC).

The Joint Committee on Finance, Public Expenditure and Reform on Thursday heard from representatives of IFAC on the findings of their recent fiscal assessment report.

In the report, IFAC questioned the wisdom of providing a moderate fiscal stimulus in the budget, and said the implementation of the new budgetary framework showed weaknesses that could undermine its effectiveness.

Ageing population

It also said the Department of Finance’s projections regarding the amount of money the next government will have to play with were not realistic, as they do not take into full account the ageing population or inflation.

Speaking at the joint committee on Thursday, IFAC chairman Prof John McHale said he was not in favour of pro-cyclical policy, whereby the government pumps money into an economy in an effort to restore it.

“We really must stop this pattern of pro-cyclical policy. What was done this year fits that pattern,” he said.

He said a core mistake is increasing spending in the good times without having enough of a cushion for the tough times.

“What you don’t want to do is repeat the mistakes that were brought on in the past, which comes from pro-cyclical budgeting. If we are hit with some negative shock in the future we don’t have to have this big austerity programme to pull us out of it.”

He also said the Government needed better medium-term planning: “We believe they really do need to strengthen their tools for medium term forecasting.”