Saturday 10 December 2016

Programmes for government allow issues to be ducked

These hastily negotiated charters can turn into a fiscal race to the bottom, and have regularly done so, writes Colm McCarthy

Published 27/02/2011 | 05:00

By the time you read this, it will be clear whether Fine Gael can form a government on its own, or with some Independents, or whether it will be a coalition with Labour. The manifestos of the Fine Gael and Labour parties, and the large number of policy documents they have issued, contain numerous worthwhile proposals across a range of economic policy issues, the implementation of which is necessary, desirable or can at least do no harm.

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Economics is not called the dismal science for nothing, so it is better to concentrate instead on the commitments which they would be well advised to drop. The first is the apparent intention to have another detailed programme for government.

The record of the last 30 years in Ireland has been one of increasingly detailed social partnership deals and it has become conventional wisdom that these were a mistake. Detailed programmes for government have done as much damage, and the reform of our politics and system of public administration should dispense with this dangerous format too.

Where a smaller and a larger party form a coalition -- the unvarying pattern after every election in Ireland since 1989 -- there will be a natural tendency for the smaller party to seek solid commitments on implementation of its voter-friendly priorities, with the larger party under pressure to respond in kind. The plan for public spending becomes the aggregate of the commitments of the constituent parties as their representatives solemnly negotiate away from reality.

This can take the form of a veto-game too, as the negotiators defend pre-election red lines, unpalatable items in the partner's programme not to be tolerated. The result has been not just upward pressure on government spending, but also downward pressure on government revenue as parties insist on the inclusion of their pet spending commitments and the removal of taxation options. This is hardly the combination required in current Irish circumstances, since the next few years will inevitably require expenditure cuts and tax increases.

Programmes for government, negotiated in a hurry and under pressure to meet arbitrary time-lines, have the potential to turn into a fiscal race to the bottom, and have regularly done so. There are other important, if less obvious, weaknesses. An incoming government can unintentionally produce, in an excessively detailed government programme, an open invitation to the civil service to withdraw for several years from their critical function of policy analysis. If it's not in the programme, it's not a priority. Worse, any daft proposal which emerges in cold print from the smoke-filled rooms assumes scriptural authority and does not get challenged.

Programmes for government can turn too easily into a charter for ducking issues. This risk is exacerbated by the practice of appointing party apparatchiks as 'programme managers' in government departments. These people can see their role as a daily battle to deliver whatever their party succeeded in stitching into the programme, and the media reinforce this mindlessness: '. . . but minister, you promised, in the programme for government, to abolish hardship . . .'

The Labour Party, towards the end of the campaign, began to specify policy changes which it would veto. Two, in particular, caught media attention: a red line for child benefit and another for free university education. They have something else in common. Both are so-called universal benefits, available to all without a means test. There is a profound dilemma here for social democratic political parties, which Labour has apparently decided to duck once again.

Just about everybody in a modern European state would accept that families with children need support, particularly if there is no earner, or if earned income is low. And most people would agree that access to third-level education should be available to capable students, even if they are unable to finance the substantial costs. But universal entitlement means that the rich as well as the poor get supported by the taxpayers under both headings.

To be quite precise, Labour wishes to help the poor, but only on the basis that there is no mechanism in place to identify who these deserving people might be. If every programme which helps the poor must also help the rich, these programmes will be extraordinarily costly and tax bills must be higher too.

Support for universal benefits is all very fine, and nobody likes means tests, but it is inconsistent to oppose the targeting of social spending while pretending that there are no taxation consequences.

Both Fine Gael and Labour have promised to raise the minimum wage from the current figure of €7.65 per hour back up to €8.65, the level prior to the reduction agreed in the IMF/EU bailout. This would bring the premium over the minimum wage in the UK, currently about 10 per cent, up to about 25 per cent. Both Fine Gael and Labour acknowledge that wage costs generally in Ireland are too high, competitiveness must be restored, and both have plans to cut politicians' pay and the remuneration of top officials in the public sector.

They appreciate that we have all been paying ourselves too much, in other words. But, simultaneously, they propose that those employing low-paid workers in Ireland should be able to pay 25 per cent more than their competitors in the UK.

There is a scheme called Family Income Supplement which provides, from public funds, an income top-up for households where earned income is deemed inadequate. A high minimum wage is logically equivalent to a universal (not means-tested) income supplement financed through an earmarked tax on employers of less skilled labour.

If people in the employed labour force are deemed to need a financial top-up, the mechanism to provide it is already in place. The IMF and EU should explain that restoring the 25 per cent premium over our UK competitors in the Irish minimum wage is not part of the economic recovery programme.

The next government will face incessant pressure to deal with joblessness and the manifestos of both parties contain flaky proposals to promote job creation. Job-desperate politicians are easy prey for lobbyists and snake-oil salesmen of every hue.

Grants, tax-breaks, new quangos and credit guarantees a la Fine Gael will all be trumpeted as the route to jobs including, of course, 'smart' jobs. Budgetary policy must unfortunately be deflationary for several years to come, and there is no plausible macro-economic strategy which would see an early recovery in consumer spending. It is quite extraordinary to hear apparently sensible people urging stimulus to domestic consumer spending. The logic is that retailing imports is the way forward. The same people appear to be able to hold the rather more plausible view that only export growth will yield sustainable improvements in the labour market.

In the short-term, the new government needs to find an approach, with the IMF and European partners, which resolves the banking mess. There is no need for credit guarantees, or a new state bank, if this can be done.

The core of any medium-term strategy with a chance of success is the reduction of the budget deficit, as quickly as possible, to a sustainable level, preferably zero.

Government schemes which add to expenditure or which reduce revenue will inevitably postpone the day when the budget comes under control, and are destructive of real job creation.

There will be no resumption of private investment until the winning-post (a solvent government) comes into view. The Labour Party's belief that a deferred budgetary adjustment is good for jobs, assuming it can be financed which may not be the case, is mistaken if it deters the essential private-sector rebound.

The equation of investment with job creation permeates public discussion and is promoted assiduously by lobbyists. We cannot afford any significant public investment programme in the years immediately ahead and we do not need one.

Economic activity in 2014, the target year of the four-year plan, will be at least one-quarter below the level envisaged in the National Development Plan (NDP). Capital spending has already been cut, and rightly so, but the NDP has yet to be formally abandoned. It contains, for example, fantasy electric railway projects in Dublin and elaborate plans for infrastructure investment around the country.

The formal abandonment of these plans, and the closure of associated quangos, would make a fine opening paragraph in the programme for government.

The remaining paragraphs should be few in number and brief.

Colm McCarthy lectures in economics at University College Dublin. He has headed an expert group examining State assets and chaired the Special Group on Public Service Numbers and Expenditure Programmes, aka An Bord Snip Nua

Sunday Independent

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