News Brendan Keenan

Thursday 27 October 2016

Deficit falling fast? It's time to tighten belts - by EU law

Published 09/04/2015 | 02:30

'I never spot a window of opportunity but I jump right through it," the petty conman Arthur Daley observed in the vintage TV series 'Minder'. Last week, the Irish Fiscal Advisory Council (IFAC) seems to have taken his advice.

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There was a certain amount of surprise when IFAC revealed its thinking on the vexed question of EU rules on government spending. This did involve jumping through a political window, since government ministers were already lobbying in Brussels for some relaxation of the rules.

I say "EU rules" because that is where they originally came from. But they are now Irish rules as well, having been put into law under the Fiscal Responsibility Act in 2012. Some of the methodology of setting government spending totals was then also included in amended legislation.

This was a sufficient revolution to require a referendum giving approval to the EU's fiscal union. The people have spoken, although at the time their minds were much more on the collapse of the economy, the application of austerity and the threat of more woe from a break-up of the euro.

Many will be surprised to learn that it could be illegal for the Government to increase spending by much in the next Budget, even though the deficit is falling fast. Or that cutting taxes will automatically reduce the scope for increased spending.

As I wrote last week, the trade unions are already alive to the threat, with trenchant criticism from SIPTU president Jack O'Connor. In fact, the analysis from IFAC was worse than the SIPTU estimate: to comply with the rules, spending would have to fall by 0.7pc next year, no matter how much tax revenue was pouring in from the rebounding economy. No wonder ministers are lobbying - but they can hardly lobby to break the law.

On the other hand, no one thinks these are good rules. The IMF is holding a conference of the great and good of economics on just these issue. Setting the scene, its chief economist, Olivier Blanchard, noted that the rules are widely seen as too complex and "suboptimal". The conference will consider whether instead, in a world of negative real interest rates, it makes sense for governments to run larger deficits and increase public investment.

One could sympathise, therefore, if IFAC had decided to pass by this particular window. There was that bit of trouble last year over the council's firmly expressed opinion that the government should stick to the original €2bn budget correction, even though the economy and tax revenues were growing nicely.

IFAC's mandate says it must "endorse" the Department of Finances economic forecasts on which the budget is based. There have been very few occasions when these forecasts were outside the bounds of reasonable possibility but there have been some - especially in CJ Haughey's day.

Should the council fail to endorse such a forecast, presumably something would have to be done. The rest of the mandate uses the words "monitor" and "assess" whether the fiscal stance of the Government fits in with EU rules and complies with the domestic legislation. But assessment is very different from endorsement. It is not really clear how much a government need be constrained by this.

The €2bn business is instructive. IFAC had accepted the economic forecasts and it was clear that the Government could meet the deficit targets without such a large correction. Had it done so, though, we can now see that, while growth and employment would have been somewhat lower last year, the deficit would have been almost eliminated and the national debt would be around €2bn less.

In other words, this was a policy choice. The Government was entitled to make the choice it did and the council, like others, was entitled to say that it did not think it the best choice. IFAC's problem is to distinguish between giving what it considers to be sound advice and those, hopefully rare, occasions when it may have to say that it thinks the government is breaking the rules, or even the law. More to the point, it has to find a way to get politicians and the public to draw that distinction.

In an ideal world - which, as usual, mean something like the Nordic countries - there would be a dialogue between government and council so that budgets were based on a consensus which did not entirely ignore political considerations but which were not entirely based on them either.

A belief that countries such as Ireland cannot be trusted to do this by themselves is the reason countries like Finland, and not just Germany, insisted on external rules. The issue of the spending ceiling shows that the game has changed. How it will be played remains to be seen.

The fiscal rules are light years away from the expectations being stirred around October's Budget. Sources are already musing about the €2bn "giveaway" which might be possible if the government decides to make no further inroads on the debt burden. Getting approval for that, however, would require a lot of successful lobbying in Brussels, and other places beginning with 'B.'

Paradoxically, the exit from bailout has made IFAC more important. The troika could set the targets and wave its cheque book threateningly if they were not being met. Now there is just those awkward rules and the council to assess whether they are being obeyed.

Like the legendary Willie John McBride, IFAC got its retaliation in first. It agreed with the Government that the parameters set by the Commission were unduly harsh because they were partly based on the economy's depressed state after the crash. Instead of spending being cut by 0.7pc, it could rise by 0.4pc.

Wow! This sort of change is not what the government has in mind, and nor has anyone else: not the opposition, not the social partners, not the bulk of the media. IFAC, however, has set out its stall. It would approve an increase like this, even if Brussels differs, but no more.

Even that approval would also require the Budget meet other EU goals - reducing the underlying deficit by half a per cent of GDP, offsetting tax cuts on the spending side and taking seriously the idea of multi-year expenditure ceilings. That would scupper almost all the election half-promises.

This is not an area where IFAC has any actual power. But it is one thing to say the Government ought to do such-and-such, as the council did last year; quite another to say the Government is not meeting the European obligations to which it agreed, as could happen this year. The recession may be over but the fun ain't.

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