The Fiscal Advisory Council has again suggested the Government make a bigger than planned series of adjustments to reduce the budget deficit.
The Council is the independent body established to monitor and report on Government budget policy.
It says the Government's medium term budget policy comfortably meets the new balanced budget and debt reduction rules introduced by the EU fiscal stability treaty.
It also says the policy meets the rules specified in the Fiscal Responsibility Bill (currently before the Oireachtas).
But in its latest report, it says debt sustainability and creditworthiness of the state remain fragile, and it believes the Government should consider an additional €1.9 billion in spending cuts and tax rises until 2015.
This is about €1 billion less than in the Council's last report.
The Council says this would help reduce debt faster and provide what it calls a limited measure of insurance in the effort to ensure debt sustainability.
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 Fiscal Council reviewed economic forecasting by the Department of Finance and other main forecasting agencies , and 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 Fiscal 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 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 Fiscal 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, a s 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 (which provides most of the tax base) as the measure of the size of the debt burden.
Using GNP - 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 Fiscal 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.
