Michael Noonan (Limerick City, Fine Gael)

The budget forecast is for real GDP growth of 1.3% in 2012. This forecast was a downward revision from that published in the medium term fiscal statement published at the beginning of November and was necessitated by the deterioration in the external environment that became evident during November. The budget forecast incorporated all of the information – both domestic and international – that was available up to end-November 2011, and was mid-range at that time. Given the highly uncertain environment, the budget documentation also outlined a number of risks to this forecast, some to the downside and some to the upside.

Clearly, the uncertainty which characterised the second half of last year remains and this is reflected in the wide range of GDP projections for this year, not just for Ireland, but also for the euro area. However, there also have been positive developments since budget time, not least of which is the trajectory for ECB interest rates which appears more favourable than when my Department's forecasts were prepared. In addition, recent exchange rate movements will provide some benefit to the exporting sector. I also note that some of the economic data – domestically and internationally – has not been as poor as some have assumed.

With regard to the fiscal targets, it is important to note that the Exchequer budgetary position at end-2011 was better than anticipated at budget time, thereby providing a small safety margin in terms of achieving the 2012 deficit target. On a purely model-based approach, a reduction in real GDP by about 1% would, all other things being equal, see the general Government deficit worsen by about a 0.5% point of GDP. However, it is worth noting that while the troika has revised down its GDP growth forecast for this year to 0.5%, it still sees the overall deficit target of 8.6% as achievable. In this respect, I would also highlight that it is the nominal growth rate of GDP - that is volume and price changes - which drives tax revenue and affects the various fiscal ratios, as opposed to just real or volume changes.

To sum up, the level of uncertainty surrounding macroeconomic forecasts for Ireland and internationally is very high. However, given that the forecasts were produced in early December and that the fiscal position ended the year marginally better than had been anticipated on budget day, there is no reason to believe our fiscal targets will not be met. As always, my Department will continue to monitor the economic and budgetary situation over the coming months, in particular the monthly Exchequer situation, and this analysis will inform official thinking on these matters. As is the norm, my Department will publish a revised set of economic and budgetary forecasts in the April stability programme update.

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