1. Economic and Fiscal Outlook: Growth, Risks and Sustainability Thomas Conefrey TASC Seminar, 21 January 2016

2. IFAC: S OME B ACKGROUND M ANDATE OF T HE C OUNCIL : 9 th Fiscal Assessment Report Five-member Council Six-member Secretariat A SSESSMENT OF F ORECASTS C OMPLIANCE WITH R ULES F ISCAL S TANCE E NDORSEMENT OF M ACROECONOMIC F ORECASTS I NDEPENDENT E CONOMIC A NALYSIS

3. Outline 1.Economic review and outlook. 2.Recent fiscal performance and outlook (IFAC Fiscal Assessment Report, November 2015). 3.Risks and imbalances. 4.Public finances in the medium term.

4. R EAL GDP, R EAL GNP AND E MPLOYMENT G ROWTH (% C HANGE Y-Y) STRONG RECOVERY AND CENTRAL GROWTH FORECASTS

5. Increasing contribution of domestic demand to recovery Source: CSO.

6. Evidence of rebalancing Source: CSO.

7. Current account near balance excluding re-domiciled PLCs

8. National Income and Consumption per Head

9. Sharper downturn + recovery than trading partners

10. Employment Rate

11. Challenges with interpreting the National Accounts Patent cliff Contract manufacturing Re-domiciled PLCs Treatment of profits in IT sector Aircraft leasing

12. But high-frequency data show expanding economy Employment Unemployment Industrial production Retail sales / consumer confidence Exchequer returns

13. Vacancy Rate

14. Industrial production volumes strong, including traditional sector Source: CSO. Notes: Traditional sector excludes all modern sectors (i.e. Chemicals and pharmaceuticals; Computer, electronic, optical and electrical equipment; Reproduction of recorded media; and Medical and dental instruments and supplies) but may still include activities with a high concentration of MNCs.

15. Good growth in retail sales augers well for consumption Source: CSO. Note: Core retail sales excludes motor trades.

16. Growth Benefitting the Public Finances

17. Exchequer Tax Revenue

18. E XCESSIVE D EFICIT C LOSED IN 2015

19. R EAL GDP F AN C HART B ASED ON B UDGET 2016 PROJECTIONS ( TO 2016) B UT SIGNIFICANT RISKS AROUND CENTRAL FORECASTS

20. C RISIS L EGACY OF H IGH D EBT AND ASSOCIATED RISKS G ENERAL G OVERNMENT D EBT

21. Risks and Imbalances Internal – Credit growth – Property prices / construction – Competitiveness External – Emerging market slowdown – Brexit – Euro Area recovery

22. New mortgage lending rising from low base

23. Construction shares of GNP below long-run averages

24. Significant supply shortfall in Dublin Source: Housing Agency; DoECLG. Note: Completions cover rural + urban settlements (private and social); requirements only cover urban settlements of 1,000+ persons.

25. Debt deleveraging continues

26. Openness makes the economy vulnerable to external shocks  China / Emerging Markets  US monetary policy normalization  Euro Area stagnation  Brexit  Long term growth slowdown / secular stagnation  Geopolitical Risks  “Unknown unknowns” Source: AMECO.

27. Growing dependence on certain sectors

28. Corporation Tax: Top 10, 20 & 50 Companies Source: Pigott and Walsh (2014); authors’ analysis of Revenue data.Pigott and Walsh (2014); Top 10, 20 and 50 Companies €bn unless stated% of Total Total Corporation Tax4.1 Top 10 Companies CT Paid1.024% Top 20 Companies CT Paid1.332% Top 50 Companies CT Paid1.946% C ORPORATION T AX P AYMENTS (A NNUAL A VG. 2008-2012)

29. Euro Area challenges

30. Pattern of Euro Area growth downgrades

31. Lessons from the crisis Difficulty of avoiding pro-cyclical policies in times of strong economic growth Importance of risk management – Looking beyond central scenarios Significant crisis-induced institutional reforms – Banking – Fiscal

32. European/Domestic fiscal rules Domestic European Corrective Arm of SGP Preventive Arm of SGP 3% Deficit Rule 1/20 th Debt Rule MTO / Adjustment path to MTO Expenditure benchmark Domestic Budgetary Rule Domestic Expenditure Ceilings Domestic Budgetary Rule Consistent with Preventive Arm of SGP Domestic Expenditure Ceilings Consistent with Expenditure Benchmark

33. Complementary domestic and European elements Effectiveness of Domestic Framework Effectiveness of European Framework Monitoring, peer pressure and possible sanctions of the European framework enhances the effectiveness of the domestic framework Domestic ownership adds legitimacy to the European rules

34. Deviations from Expenditure Plans

35. C ONTINUOUS REVISIONS TO M ULTI - YEAR EXPENDITURE CEILINGS C HANGES TO C URRENT E XPENDITURE C EILINGS Budget 2013 Budget 2014 Budget 2015 Budget 2016

36. U SE OF UNEXPECTED I NCOMING R EVENUES TO FUND A LARGE INCREASE IN SPENDING IN 2015 R EVISIONS TO E XCHEQUER E XPENDITURE AND T AXES FOR 2015

37. Medium-Term Fiscal Plan in Budget 2016 Budget 2016 medium-term fiscal projections include: – €0.4 billion per annum for demographic pressures – Cost of Lansdowne Road Agreement until 2018 Tax forecasts allow for indexation but assume no change in policy, despite stated commitments to reduce taxes. Medium-term plans imply over-compliance with fiscal rules although stated policy is for minimum compliance. Develop an alternative medium-term expenditure scenario for 2015-2021 Scenario takes into account estimated demographic changes and assumptions on the cost of providing public services based on Budget 2016 macro projections.

38. Budget Projections imply Steep Fall in Primary Spending

39. Comparison of Expenditure Scenarios

40. Capital Expenditure

41. Expenditure Scenario and Estimated Fiscal Space

42. Conclusion Significant progress made in resolving Ireland’s fiscal crisis. Encouraging central scenario for projected growth. But significant risks around that scenario in environment of elevated uncertainty. Institutional reforms should help avoid repeat of past mistakes. Important to address weaknesses with the Government’s medium-term fiscal plans beyond 2016 and with implementation of multi-year expenditure ceilings.