THE EUROPEAN Union’s rules on deficit limits should take into account whether a country has volatile tax receipts, governor of the Central Bank Patrick Honohan has said.
Prof Honohan said a country like Ireland which over the last decade depended on volatile sources of capital “would be required to aim at a better fiscal performance – a lower deficit or even a surplus”.
Deficit figures should be decided for countries in the way bank regulators impose capital levels on financial institutions, he said. The EU sets a deficit limit of 3 per cent under the Stability and Growth Pact, which the Government has pledged to meet by 2014 with a four-year recovery plan amounting to €15 billion in tax increases and savings on spending.
Speaking to the Institute of Certified Public Accountants in Ireland, Prof Honohan said a risk-adjusted deficit could “insulate countries from the sudden emergence of a structural deficit”.
“It should certainly be factored in to medium-term fiscal planning at national level, to be brought into play when the budgetary accounts have been brought fully under control again in a few years’ time,” he said.
One of the main reasons why Ireland’s Government-exposed fiscal position was “so exceptional” was because of the “heightened elasticity” of taxes. Ireland has become “dependent to an exceptional degree” for taxes on profitable economic conditions, high transactions in the property market and asset price increases, he said.
Speaking on the Government’s pending four-year recovery plan, Prof Honohan said without a managed fiscal adjustment, “market forces will take over and put a stop to the unsustainable increases in the debt ratio”.
“Anything that is unsustainable will stop. A sequence of double-digit Government deficits is certainly no exception to this rule.”
Prof Honohan said he was hopeful the adjustment in the public finances will – “not least by rolling back unaffordable excesses – be accomplished in a manner that is much less damaging to the economy and the society”. This will ensure the fiscal correction will help to restore “lost cost competitiveness” and enhance growth potential “while aiming at a fair distribution of the burden”.
Responding to a question on Government borrowing, Prof Honohan said Irish sovereign debt was “a great buy at current prices”. Traditional bank accounting practices had not been geared to deal with “assets that are so uncertain and long lived, an economy that has tanked so deep and future economic prospects that are so uncertain”, he said.
Criticising the role of accountants in the banking crisis, he said they should have been more concerned with “post-balance sheet events” and “could have done better” in seeing the need for expected loss forecasts and the scale of property price falls.
Prof Honohan said if the projected forecasts for Anglo prove accurate, the net long-term cost will be lower than €29.3 million. This would happen if the offer on subordinated bondholders is successful and due to the capital left when the bank is wound up.
