OREANDA-NEWS. Ireland's 2016 budget does not alter Fitch Ratings' view that the sovereign's budget deficit will continue to narrow, implying declining debt over the medium to longer term. A strong fiscal performance since the start of 2015 has made room for some stimulus without putting the original deficit target in danger.

The 2016 draft budget includes tax cuts and spending increases worth about EUR1.5bn (0.75% of GDP). Revenue measures include raising the entry threshold and cutting the lowest rates of the Universal Social Charge, and ending the private sector pension levy introduced in the 2011 budget.

The economic recovery has boosted budgetary performance so far in 2015. Exchequer returns in 3Q showed receipts from corporation tax, VAT, and social insurance ahead of target thanks to rapid growth (corporation tax receipts were 44.2% ahead). Government spending was EUR500m below target, mostly due to lower debt-servicing costs.

The 2016 budget is therefore consistent with last year's decision by the coalition government to overspend in the fourth quarter after better-than-expected outturns until 9M14. Moreover, some fiscal easing ahead of general elections, which must be held by 8 April next year, is not surprising. It does not change our expectation of further budget deficit narrowing, with Ireland exiting the excessive deficit procedure (EDP) in 2016, and debt-to-GDP continuing to decline, albeit from a very high level.

The sovereign's fiscal credibility has been underlined by its meeting of the original EDP deadline set nearly five years ago, after reducing the headline deficit by nearly 10pp. A strengthening recovery and favourable financing conditions buttressing fiscal consolidation were among the drivers of our revision of the Outlook on Ireland's 'A-' rating to Positive from Stable in August.

We assume the next Irish government will remain broadly compliant with the EU and national fiscal rules, and a primary surplus of 1%-2% of GDP will be maintained over the medium term. This will remain an important driver of debt dynamics, as it is not clear how long Ireland will maintain the very high growth rates of this year. The large role that economic recovery has played in improving fiscal performance is indicated by the fact that the structural deficit has narrowed significantly less than the headline deficit. Furthermore, with stronger-than-expected growth the fiscal stimulus in 2016 is pro-cyclical and therefore likely to increase economic volatility.