Pearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

17. To ask the Minister for Finance the reason the medium-term economic strategy contained only forecasts based on a baseline macroeconomic economic assumption and a high growth macroeconomic assumption; if other forecasts were made based on other assumptions such as lower growth; if he will publish these forecasts; and if he will make a statement on the matter. [1652/14]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The baseline scenario set out in the Medium-Term Economic Strategy (MTES) is based on the Budget 2014 projections out to 2016. Projections thereafter are based on an estimate of Ireland’s potential output, factoring in assumptions regarding population growth, participation rates and labour productivity growth. Projections over 2017 to 2020 benefitted from input from PMCA consultants and constitute a reasonable trajectory for real growth, labour productivity and employment. The baseline scenario represents my Department’s current best estimate of the future path of the macroeconomic variables set out in the MTES. GDP growth over 2013 to 2020 is projected to average 2.6 per cent per annum, compared with an equivalent figure of 3.6 per cent in ESRI’s July 2013 Medium Term Review .

It is important to emphasise that the high-growth scenario which the Deputy refers to is not a forecast for the economy. Rather, my Department, working with the ESRI’s HERMES model, sought to quantify the economic impact of a suite of potential policy measures. The range of conditions modelled included greater dividend from existing labour market activation policies, re-orienting the tax system away from labour-related taxes, a lower cost of credit, and improvements in the stock of human capital. In broad terms, the aggregated effect of these was added to my Department’s baseline projections to show what the impact of implementing policies to support such conditions would be on the economy. Their combined impact on output, employment and the public finances constitutes the ‘high-growth scenario’. Again, I stress that it does not represent a forecast for what will happen to the economy; rather the objective was to demonstrate the impact which reforms would have on the economy.

As part of its enhanced risk function, my Department constantly evaluates emerging economic risks, both positive and negative, and assesses their potential impact upon the economy. In undertaking this modelling exercise, a number of different potential policy measures were considered. Not all of these measures were modelled and not all of the measures that were modelled were included in the final suite of policy measures included in the MTES high-growth scenario. As the HERMES model results are broadly symmetric, the results of a number of the policy measures modelled can be considered as having either a positive or negative impact upon output. For instance, the results of an improvement in competition policy which lowers inflation and boosts growth can also be interpreted negatively as the results of a deterioration in competition which raises inflation and lowers growth.

Packages of policy measures which negatively impact upon the economy were also considered. The purpose of modelling these policies was to quantify downside risk and estimate the potential cost of policy errors. However, as the Government does not intend to knowingly undertake erroneous policy choices, the results of these scenarios were not included in the MTES.