The Fiscal Advisory Council has once again suggested the Government makes a bigger than planned series of adjustments to reduce the budget deficit.
The council says the Government’s medium-term budget policy comfortably meets the new balanced budget and debt reduction rules introduced by the fiscal treaty.
It said that the policy also meets the rules specified in the Fiscal Responsibility Bill, which is currently before the Oireachtas.
However, it says that the debt sustainability and creditworthiness of the State remain fragile.
It believes the Government should consider an additional €1.9bn in spending cuts and tax rises over the period to 2015. This is about €1bn less than in its last report.
It says this would help reduce debt faster and provide what it calls a limited measure of insurance in the effort to ensure debt sustainability.
The independent body was established to monitor and report on Government budget policy.
It warns that the Government's current medium-term budget plan is heavily dependent on achieving significant spending cuts and a sustained upturn in economic growth.
It repeats its previous advice that the Government should not rule out income tax increases and cuts to public service pay and social welfare rates, given the scale of the budget adjustment needed.
The council reviewed economic forecasting by the Department of Finance and other main forecasting agencies.
It found that the pattern of forecasting errors was similar across all agencies, with significant errors in 2008 and 2009, followed by much more accurate forecasts in 2010 and 2011.
The council says economic forecasters remain of the view that growth rates of about 3% will return over a two to three-year period, even though similar forecasts of such a rebound have not materialised.
It explores the theory that this may be due to the "balance sheet recession" effect, in which large numbers of consumers and companies concentrate on reducing their debts, which has the effect of snuffing out expected rebounds in growth and prolonging the economic downturn.
It said: "The turnaround in the economy has been consistently forecast to start around the time the forecast was made and then to recover at a healthy pace.
“However, this has not occurred. For example, the recovery that had been expected to occur in 2010/2011 did not materialise and, instead, it is now envisaged to occur, albeit at a slower pace, in 2014/2015."
It found a pattern of consistent lowering of GDP and GNP forecasts by the Department of Finance and other official forecasters, including the EU and IMF, and raises the possibility that the close involvement of these agencies in Irish economic management through the Troika has led to a sharing of assumptions used in economic forecasting.
It says uncertainty about future outcomes should be more explicitly factored into the presentation of official economic forecasts, by presenting a range of possible outcomes, rather than a single figure.
The council says it does not see any case for the relaxation of the Government’s fiscal plans, even in the event of some form of debt relief on the costs of the bank bailout.
It says such relief would increase the chances of a successful adjustment, as measured by "a robust return to market creditworthiness". But it warns such relief would not be a panacea for Ireland's budgetary problems.
It says debt sustainability remains fragile, and opinions on sustainability are coloured by whether one uses GDP or GNP as the measure of the size of the debt burden.
Using GNP, which is the standard measure, Ireland’s debt ratio will peak next year at 120%. But using GNP, which strips out the effect of foreign multinationals in Ireland, the debt ratio would peak in 2014 at 154%.
Because the foreign multinationals do leave some taxable presence in the economy, the council explores a hybrid measure, lying somewhere between GDP and GNP, which would show debt peaking next year at 138.8%.
In all scenarios, the adjustments required to set the debt on a sustainable path are very large, one of the reasons why the council advises a bigger series of adjustments than planned by the Government.
Taoiseach Enda Kenny said the Government "will reflect" on the report, but pointed out that it is not binding on the Government and that it already has medium-term targets for the economy.
Mr Kenny said the aim of the Government was to meet its medium-term targets and this morning's bond auction had gone well.
Sinn Féin President Gerry Adams has said the council should "get lost" and described it as reckless for its suggestions.
