Thursday 27 October 2016

The promises of Spring may be too much to believe in

Published 07/05/2015 | 02:30

One was only a week away, and the other almost a year but, let's face it, the next election was behind statements from both the British and Irish governments last week. It is cheering to be able to say that, for once, UK politics were more bizarre than ours. I refer to David Cameron's pledge, if elected, to introduce legislation which would prevent him raising income tax or VAT rates during the next parliament.

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Of course, who is to say we might not see something similar here before next spring. Mr Cameron's promise has echoes of the several attempts to get detailed stuff inserted into the Irish constitution, to prevent the Oireachtas doing what the protagonists do not want.

A more precise similarity is with Charlie McCreevy's legislation which prevented government spending the money in his National Pension Reserve Fund.

Of course, nothing stopped the legislation being repealed when the bubble burst, and the money being used to save the banks. One wonders what would have happened if there had been a constitutional prohibition on spending it. British commentators noticed that Mr Cameron's promise is essentially worthless, even if delivered, because it can always be reversed if required.

The Irish election gambit was the Spring statement. It is not without its bizarre elements too but the real similarity is that both were driven by the difficulty of persuading voters that the politicians mean what they say.

So what else is new? Actually, I think the credibility problem is getting worse. There seem to be natural inflation tendencies in election promises, just as in asset prices.

Part of the it seems to be increasingly irresponsible oppositions. Fine Gael and Labour know all about that, too, while Fianna Fail are discovering, like others before them, that there is little mileage in the relatively responsible stance into which circumstances have forced them.

There is another element in Britain, where outside bodies such as the Institute of Fiscal Studies, and the official Office for Budget Responsibility (now there's a a title) have concluded that neither Conservative nor Labour manifestos can deliver the reductions in the deficit which both have promised.

The UK deficit is almost 5pc of GDP. Net public debt, at around 80pc of GDP, will soon be approaching Ireland's falling ratio. Promises be damned, these figures will have to improve over the next five years. Incredulous British voters have a point.

There is some discussion whether something similar to these outside assessments should be tried here. The Irish Fiscal Advisory Council is one obvious choice: to analyse, not just government policies, but the election manifestos of all parties as well.

Personally, I quail at such a prospect, as do some members of IFAC. It would be an admission that politics is failing, and we really ought to try to fix the politics. In the meantime, we have the Spring statement, which IFAC is entitled to analyse, and everyone else is entitled to have a go at.

The statement is an attempt to convince the citizens that the Government means what it says, although the timing is strange. There may be a feeling that the space between the October budget and the general election may be too short for the glad tidings to sink in. It also fits in with what is likely to be an election strategy of warning against the dangers of handing the recovery to what the coalition will portray as an assortment of failed parties, fringe parties and odds and sods. From its point of view, the sooner people believe in a sustained recovery, rather than the famous dead cat bounce, the better.

There is also the opening of the "National Economic Dialogue" in July. As we remarked last week, if this is to be any more useful than its ill-fated predecessors, it will have to work off some kind of agreed set of forecasts and take them seriously in its decisions.

The statement was presented as just such a set of figures. It was claimed that it brings Ireland into line with the medium­ term fiscal planning seen in Britain and other countries.

Only up to a point, although the timing is also part of the new EU rules on the budgetary process. These do indeed apply to medium term targets for deficits.

The statement sees the public finances move into balance in 2018, even after more than €9bn has been spent on interest payments on the national debt. By 2020 there is a surplus of almost 2pc of GDP. That implies a surplus on the actual running of the country of almost €14bn, or 6pc of forecast GDP.

That is hard to believe. It would certainly be pretty much unprecedented. And this target is to be met after the the anticipated tax cuts and spending increases which we are led to believe will be bestowed upon us in the next Dail. There is no information on how this is to be achieved. Those tax cuts and extra spending already announced, such as USC changes, are included in the figures up to 2016. After that, no new policies are included, except for the admittedly important one that income tax bands will be indexed in line with expected wage increases of 2pc a year.

Even with these measures, tax revenues are meant to rise by €4bn by 2016 and day-to-day spending, which was over target last year, to remain unchanged. The figures can be altered in the October budget but at what cost to the ambition of getting the deficit below 2pc of GDP by 2017?

From 2017, the document is purely technical. Tax revenues, after indexation, rise in line with economic growth, in a ratio which has been amended somewhat based on past experience.

Such experience also tells us that keeping public spending constant - as the document does, requires "cuts", not just leaving policies unchanged. Expenditure minister says there is space for €300m a year - less than 1pc - but more if everything goes right.

Before any reckless opposition politicos jump on all this, it must be said that, if the economy does grow by 3pc a year, the next government will indeed be able to cut taxes and raise spending. It is just that this document tells us nothing about how it might be done, and what it means for the public finances.

It depends, among many things, on whether the Government wants to run a huge surplus before interest payments, and whether the EU can make it do so if it doesn't.

Irish politicians, encouraged by officials, have decided that setting out real policy choices over such an extended period is not a good idea.

One can see their point but they cannot then complain too much if people are unwilling to just take their word for it.

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