Accounting firm EY has warned that the Government’s capacity to deliver “voter-friendly” budgets will remain highly constrained for years to come in spite of the advancing recovery.
In a new all-island forecast which said economic growth in the Republic would outpace the North and Britain for 10 years, the firm said the turnaround should not prompt complacency in policy-making or business planning.
“A number of headwinds are likely to moderate growth from the 2014 levels and many businesses and individuals are yet to feel any real sense of recovery,” said Prof Neil Gibson of the University of Ulster, economic adviser to EY.
The firm, formerly known as Ernst & Young, said the recovery must be seen in the context of the prolonged recession from which the island and its citizens were emerging.
“At first glance one might expect the Republic of Ireland to now be able to relax the purse strings as its public finances are in better shape, but the reality is, with high debt and EU rules, even with its deficit under better control the Republic is not going to be in a position anytime soon to have a more expansionary fiscal policy,” said Prof Gibson.
Good news
“So despite all the good news about the Republic of Ireland economy and it being the poster child of the euro zone crisis economies, a more voter-friendly budget will not be on the horizon for several years.”
Mirroring growth upgrades by the Government and several external agencies, EY's Winter Eye report suggests Irish gross domestic product will expand 4.8 per cent this year and by 3.3 per cent in 2015.
Citing the threat of deflation in the euro zone, the fragility of global markets and Russia-Ukraine tensions, it said domestic and global risks abound.
Fiscal journeys
“The contrasting stages of Republic of Ireland and Northern Ireland on their fiscal journeys will have an important economic influence and impact on confidence over the next five years.
“Northern Ireland is staring at the most painful phase of its austerity to date. Republic of Ireland’s Budget 2015 represented the end of seven painful austerity budgets with a first tax cut and spend-increase budget for many years.
“Northern Ireland’s pain should at least be ameliorated by its growing private sector, with many sectors not directly dependent on levels of public spending.”
While recognising the shift in international policy attitudes in favour of stimulus, EY said the scale of the national debt will hold back the Republic in the medium term.
“There is unlikely to be a return any time soon to large rises in public spending, in nominal or real terms.”
