Council Opinion

of 12 February 2001

on the 2000 update of Ireland's stability programme, 2001-2003

(2001/C 77/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 February 2001 the Council examined the 2000 update of Ireland's stability programme, which covers the period 2001-2003.

The Council notes that the Irish economy continues to grow rapidly in 2000, with real GDP growth of 10,7 % expected in the 2000 update. Employment growth in 2000 is estimated at 4,5 %, with the unemployment rate declining further to 4,1 % on average. Inflationary pressures have intensified. Average HICP inflation rose to 5,3 % in 2000. While this upsurge in price inflation is partly due to external and temporary factors, which are expected to fall gradually out of the consumer price index, domestically generated inflation has increased too, house price inflation remains very high and wages are rising rapidly.

As a result of strong economic growth, the projections in the 1999 update of the stability programme for the improvement in the budgetary situation were exceeded by a large margin. The Council welcomes the fact that the general government balance for 2000 remains in substantial surplus, estimated to be around 4,7 % of GDP, and that another sharp reduction in the general government debt ratio was achieved.

Projections for the period 2001 to 2003 show an average surplus ratio of 4,2 %, with the debt ratio declining further to less than one quarter of GDP by 2003. The Council welcomes the fact that, as in the original programme and its 1999 update, Ireland fully and comfortably fulfils the stability and growth pact obligations throughout the period covered. The projected general government surplus is clearly sufficient in each year to provide a safety margin against breaching the 3 % of GDP reference value in the event of normal cyclical fluctuations.

The macroeconomic scenario underlying these projections assumes a gentle decline in real GDP growth and in inflation over the period. The positive output gap, after an estimated 4,5 % of trend GDP in 2000, is expected to peak in 2001 at 5,4 % and to decline gradually thereafter. In this context, the Council considers that the stimulatory nature of the budget for 2001 poses a considerable risk to the benign outlook in terms of growth and inflation portrayed in the 2000 update. The Council considers that this budget the main measures of which are indirect and direct tax cuts and substantial increases in current and capital expenditure is pro-cyclical. The Council finds that it will give a boost to demand of at least 0,5 % of GDP and that its possible supply effects are likely to be small in the short term, thereby aggravating overheating and inflationary pressures and widening the positive output gap.

In particular, the strategy of inducing labour force increases through an alleviation of the direct tax burden, which was recommended in the 2000 broad economic policy guidelines (BEPG) with respect to the labour market, may have become less effective than in the past because it took place in the context of an expansionary budgetary policy, and the tightness of the labour market could well hamper further attempts at encouraging wage moderation with direct tax cuts. Further, while indirect tax cuts have a once-and-for-all effect on the price level, they probably have no lasting effects on the rate of inflation but clearly further stimulate demand.

Given that the monetary policy is now set for the euro area as a whole and no longer available as an instrument at national level, other policies, including budgetary policies, must be used more actively. Against this background, the Council finds that the planned contribution of fiscal policy to the macroeconomic policy mix in Ireland is inappropriate. The Council recalls that it has repeatedly urged the Irish authorities, most recently in its 2000 broad guidelines of the economic policies, to ensure economic stability by means of fiscal policy. The Council regrets that this advice was not reflected in the budget for 2001, despite developments in the course of 2000 indicating an increasing extent of overheating. The Council considers that Irish fiscal policy in 2001 is not consistent with the broad guidelines of the economic policies as regards budgetary policy. The Council has therefore decided, together with this Opinion, to make a recommendation under Article 99(4) of the Treaty establishing the European Community with a view to ending this inconsistency.

The Council welcomes the fact that the 2000 update addresses the issue of structural reform. In particular, the Council notes with satisfaction the progress made in the area of long-term sustainability of the public finances with the creation of a National Pensions Reserve Fund, which at end-2000 already amounts to about 6,3 % of GDP. The Council also welcomes continued efforts to enhance the quality of public finances through reform of the tax/benefit system and an increased focus on capital expenditure in response to Ireland's infrastructural needs.

(1) OJ L 209, 2.8.1997, p. 1.