Friday 9 December 2016

Brussels won't let Noonan make pre-election budget mistakes of the past

Published 17/09/2015 | 02:30

Finance Minister Michael Noonan. Photo: Gareth Chaney / Collins
Finance Minister Michael Noonan. Photo: Gareth Chaney / Collins

Michael Noonan's last budget before the general election is less than a month away. The election is likely to be early in the New Year, possibly February, unless there is a change of mind and Enda Kenny opts for November.

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Pre-election budgets follow a certain ritual. The Government swears it won't be a giveaway aimed at buying votes ("no daft spending" according to Michael Noonan). All the while it gives away as much as it can to as many different groups as it can. The opposition accuses the Government of trying to buy the electorate regardless of what is in the budget ("promises would cost billions", according to Fianna Fáil's Michael McGrath).

Budget giveaways can work but Noonan is more constrained by EU rules than ever. And we have not been in this kind of situation since 2002 or even 1997. The 2010 budget before the last general election came in the teeth of a financial crisis and the country was on the edge of a bailout. Fianna Fáil was already doomed.

The last budget before the 2007 general election was delivered by Brian Cowen in December 2006. The country was at the height of a debt-fuelled artificial boom in which all rationality had disappeared.

Charlie McCreevy's last budget before the 2002 general election wasn't really comparable to the current situation either. The country was basking in full employment (unemployment was around 4pc). Our debt to GDP ratio was 34pc compared to around 100pc today. Ireland's national debt was around €36bn. Today it is €200bn.

McCreevy stood up in the Dáil and declared that he wasn't going to repeat mistakes of the past by borrowing too much money. So he declared there would be no government borrowing in 2002. He said he would be prudent.

He then announced a massive €1.9bn tax and spending giveaway which included an enormous 10pc hike in current spending. Pensioners and social welfare recipients were big winners as were parents through child benefit increases. The social welfare package was worth €1bn. Incredibly McCreevy took another 380,000 workers out of the tax net altogether. Fianna Fáil was re-elected.

Before that, in January 1997 the Labour Party's Ruairí Quinn delivered his last budget before the election which followed later that year. Unemployment was at 11.8pc. Debt to GDP was 73pc.

Quinn did announce a budget giveaway when he cut the standard rate of income tax from 27pc to 26pc, increased social welfare, pensions and child benefit.

Interestingly, he also cut the rate of Corporation Tax from 38pc to 36pc. It is easy to forget that businesses paid that level of Corporation Tax, except manufacturing and internationally traded services which paid 10pc.

Quinn's budget giveaway was measured and responsible. His current spending increase was just 1.5pc. His increase in capital expenditure was offset by savings elsewhere. That budget gave a little to the usual pre-election constituencies of social welfare, pensioners and income tax but probably not enough. Fianna Fáil swept to power that year.

For Michael Noonan in 2015 all has changed utterly since then. Since 1997 we have risen to economic heaven, crashed down to economic hell and are now trying to emerge from purgatory. How much is too much to give away?

Noonan will stay within the parameters of the EU rules, but there will be very little by way of a buffer should our economic fortunes stall or slide. The OECD and others are concerned.

The budget package in a few weeks' time will be around €1.5bn, made up of €750m in tax cuts and €750m in spending increases. He is likely to play around with the size of the giveaway a little more by introducing some new taxes, most likely on cigarettes.

That could give him around €1.7bn with which to play around. A €1.7bn package comes after a €1bn tax and spending budget package last year. Instead of a scheduled €2bn in cuts in last year's budget, he opted for a €1bn giveaway. Noonan was taking an economic risk that the recovery would hold. It paid off. But eaten bread is soon forgotten and he may be about to take a risk again.

There is a growing expectation among various interest groups that they will get something. Pre-election budgets tend to spread the gain very widely. There is a consistent pattern of income tax cuts, social welfare gains and something for pensioners. Child benefit increases are another mechanism for putting some money into more peoples' wallets. Child benefit is expected to go up by €5, as flagged in last year's budget.

This is a far cry from the discussion a few years ago about reforming the child benefit system to make it more equitable and effective.

The government knows it can't afford to sign up to pension and social welfare increases, especially with a raft of new expenses coming down the track, from public sector pay restoration to a health budget that is still not contained.

Instead we are seeing speculation of a part restoration of the Christmas bonus. The Universal Social Charge is expected to come down, while the self-employed and farmers will move towards parity of tax treatment with PAYE workers with a tax credit.

"A little for everybody" is the standard pre-election approach. But there are real risks on the horizon. The economy is firing well but it is artificially boosted by cheap oil, a cheap euro and cheap interest rates.

The Chinese slowdown, the US interest rate issue, and very serious warnings from the Bank of International Settlements of a possible global debt crisis, look troubling.

At home we have sizeable new burdens coming on our public spending. As the population gets older pressure on our health budgets will increase further. Irish ageing will add €200m per year to health costs, while higher birth rates mean we will need 3,500 extra teachers by 2021.

Next year natural growth in the need for public services will increase spending by €300m. Our GDP might grow by four or five per cent per year in the short term, but our spending can only grow by a lot less than that as we try to pay down national debt.

There are serious social issues that need to be resolved in the short term, such as social housing and the health service and they will cost money.

The economy is growing at 5pc per year for now. Does it need a €1.7bn budget stimulus package? It is a bit of risk but by pre-election budget standards, it isn't total madness either.

Enda Kenny will be the next Taoiseach. The only thing to be decided by the electorate is whether it will be Fine Gael with Labour, with Labour plus some others, or with Fianna Fáil. All other combinations are unworkable.

It would not be worth risking so much of the hard-earned improvement in exchequer finances for a handful of personnel changes at the Cabinet table.

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