Tuesday 27 September 2016

Even a generous Budget may not be enough for this Dáil

Published 15/09/2016 | 02:30

Michael Noonan presents Budget 2015. This year’s version is back to that ‘dratted fiscal space’
Michael Noonan presents Budget 2015. This year’s version is back to that ‘dratted fiscal space’

THIS will be a Budget like no other - irrespective of who gets it through, or when exactly. Not even 1981-82, when there were three Budgets, from different governments, will quite compare. It is all about politics, then and now. The minority administrations of Charles Haughey and Garrett FitzGerald failed in efforts to get TDs who were not in the government to support their Budgets. Now, the efforts concentrate on Independents who are inside the Cabinet tent.

  • Go To

An even more striking difference is that the failed Budgets of 1981-82 were crisis measures of the kind we saw again all too painfully again in 2009-12. Behind the title spin of Mr Haughey's "The Way Forward," was a massive programme of spending cuts, which could only take the public sector backwards.

Six months later, Dr FitzGerald fell on cuts to food subsidies, although there was a better media angle about children's shoes, VAT and women with small feet. (Look it up, if you must).

It is not a crisis Budget coming up this year. Indeed, last week the fiscal watchdog, Ifac, suggested the plans are as generous as is prudent, and more generous than the Government has claimed credit for. Strange stuff already.

It's back to that dratted "fiscal space". It's been put at €1bn next year - theoretically the amount available for spending and tax reliefs in the Budget. But the Government has been merrily adding to spending both this year and last; most notably in health, where an extra €500m has been allocated for 2016.

There's half the fiscal space accounted for already, and most of it represents continuous annual spending. In total, IFAC reckons government plans amount to €2.4bn. By any standards, that ought to be a vote-winning Budget but so much of it is already eaten bread - the Lansdowne Road deal in particular - and the political atmosphere is so febrile, that the Government may struggle to get it past the Fianna Fáil power brokers and the Independent kingmakers. Another difference from those past collapses of government is that they prolonged the financial crisis of the time. This time the danger is different - not that the country would be in another crisis, but that it could be left dangerously exposed to one.

One possible crisis is already in plain view - a harsh Brexit with restrictions on trade. Ifac estimates that, if negotiations go badly, slower growth could knock some €3bn off the €11bn fiscal space projected for the next five years.

Another clear and present danger is to corporation tax receipts from multinationals. It was there before the Apple case, but that may exacerbate it. These receipts have been surging - €2bn above expectations last year at €7bn and running strongly this year.

No one will say for sure exactly why but, ironically, it may be because the companies were making more use of Irish tax arrangements as pressure is put on offshore havens.

The Apple judgement might make some of them think again about moving more assets to Ireland. Even if it doesn't, and even if Europe does not force their hand, these could still turn out to be temporary revenue gains. The way things are going, they will have been committed to permanent spending, adding to the dangers from a general slowdown.

It is already depressingly clear that the government's estimates for public pay costs are out of date. The settlement with Dublin Bus drivers, when it comes, will ripple all the way through to civil servants behind desks over the next few years, via gardaí, nurses and secondary school teachers, among others. In areas like pensions and health - especially health - there are long term challenges which will outlast the next recession. Last week saw the annual Aviva survey on the frightening drop in living standards which awaits most private sector workers when they retire. One can argue endlessly (as a member of the Pensions Council, I do) about how much should be set aside for retirement and how it should be done. What is not in doubt is that a great deal will have to be set aside by the State, as well as by individuals.

The crisis in the health service will come sooner than that. Its present travails are only the start. I saw one medical person describe the €40m allocated for the pressures of winter as "a drop in the ocean". So it is, in the context of the €18,000m health budget. The problem is that there is no ocean from which to extract the buckets of extra money, rather than drops, which the costly Irish health service insists it requires.

This is the background to the call from Central Bank Governor Philip Lane, in his letter to Finance Minister Michael Noonan, for more detailed long-term targets in the Budget. This Governor's letter is an annual event but, in the new spirit of transparency, Prof Lane has decided to publish it. A nice, short little missive it is too - probably of more help to most finance ministers than the normal detailed policy briefs.

Dr Lane shares the concerns of probably every economic analyst, whatever their individual views, about the lack of any detailed information on where the public finances are meant to be going, and how they are to get there.

The Governor rather chillingly queries whether the general EU target of getting public debt to 60pc of GDP is tight enough for Ireland's circumstances - and not just because GDP is now far too generous measure. Filling in the details on how that might be done would certainly create political vapours.

As I said out the other week, the official revisions to GDP mean it requires complicated arithmetic just to know what is going on now. Ifac has had its calculator out and reckons that a realistic assessment of Ireland's debt is that it is just under one year's economic output - the old rough definition of GDP. (I will not even try to tell you how they did it).

The debt ratio fell by the equivalent of one month's national income over the past two years - a period of rapid growth.

So the target is extremely demanding, both politically and practically, but not quite impossible for Ireland - unlike many EU states.

That's the trouble with such targets. They can actually promote fatalism and inaction. Detailed government projections on what this objective requires might cause a terrible rumpus but without them, there seems little possibility of progress. In health in particular, spending will have to be held close to the present 10pc of (realistically measured) national income, even as an ageing population adds to costs.

I confess that I do not know how this is to be done but the first thing is to explain the simple percentages which show why it must be done. Irish health spending is on an unsustainable trajectory and what cannot go on forever always comes to an end somehow.

The politics of today could hardly be less suited to that kind of planning and curbing of demands for consumption today. If a Budget which, to quote Ifac is "on the limit of what is prudent" cannot get through, we will at least know where we stand. Or, to be precise, where we are not standing.

Indo Business

Read More