Thursday 27 October 2016

We must play by the rules of a different Budget game

Published 15/10/2015 | 02:30

You have the advantage of me. You know what was in Tuesday's Budget whereas, as the time of writing, I do not. Still, one must make the best of any situation and there may be no harm in looking at the run-up to Budget day.

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That does tend to get forgotten once the details have been revealed. The fuss over whether those details are good, bad or indifferent may be one explanation as to why the system of preparing the Budget, both political and practical, seems so difficult to change.

This year certainly appeared to illustrate that. As the Budget grew nearer, economic forecasts became more upbeat and the monthly Exchequer returns on revenue and expenditure grew ever healthier. At the end of last month, tax revenues were €1.7bn, almost 6pc, above last October's target.

On the economy, last week DKM consultants published their consensus forecasts, an amalgam of individual forecasts. These now suggest that output (GDP) will expand by 5.6pc this year and 4pc in 2016.

Recovery has now entered a more stable phase, with strong increases in personal consumption, investment and government spending being added to the exports which drove earlier growth.

Problems abroad explain the sharp reduction in forecast growth next year. We are fortunate that it did not happen last year, when the impressive 4pc growth would not have been feasible.

This takes us to the first concern about pre-Budget debates; the absence in them of medium term views of where the Budget fits in, and what it seeks to achieve. The Department of Finance presented its view to the joint committee on Finance, Public Expenditure and Reform but this key bit of information never seems to have much effect on the debates.

It does not help that Mr Noonan will not discuss the fiscal situation or the implications for policy with the committee. That must all wait for Budget day, which is not the best way to work towards medium term stability.

Naturally, the department's projections set out the ideal. It is worth knowing what that golden period would look like. It is not particularly conservative about next year, forecasting growth of 4.2pc, which it will have increased after the stimulus in the Budget.

Growth forecasts are the one part of the Budget which require external endorsement - by the Fiscal Advisory Council. On policy, it can only give its opinion. As it happens, the council's opinion sparked just about the only debate on budget policy - as distinct from budget goodies. This was its claim that the government's spring statement did not conform with either the spirit or the letter of the new EU rules - and new Irish laws - for controlling government borrowing.

It acknowledged that, while open to criticism, the spring statement is a great improvement on the past. It sets out, early in the year, the Government's assessment of its fiscal space: or, in the usual language of budget debate, "how much it had to give away".

That was €1.2bn-€1.5bn. The council thought that even the lower figure did not meet the rule which says the underlying deficit must fall each year by 0.6pc of GDP. The governing class shows little enthusiasm for making such matters a central part of national politics (admittedly, it is difficult stuff) but there was some sense of people waking up to the fact that we are supposed to be playing a different game than in the past.

It is strange. One might think that a country which has been brought to the brink of ruin would be determined to scrap every vestige of the old game. Instead, the obsession with banking has blinded most people to the fact that the inability to deal with the underlying state of the public finances, rather than their annual performance, itself brought ruination.

After this reasonably sophisticated spring sparring, monthly good news from the Exchequer returns brought back the old game - how much would 2015's revenues amount to, and how should they be distributed? What is needed, though, is a separation of the two reasons given - reducing the debt burden and avoiding boom-bust cycles. The first can be achieved in time; the second is a permanent challenge.

One key to meeting that challenge is keeping inside the spending ceiling rule which comes into force next year. This limits annual rises in public spending to the economy's medium-term potential growth; irrespective of how well it is growing and how much revenue it is generating now.

At the height of the bubble, the economy was growing at a rate which would have made it as big as the United States' in 25 years. Clearly, that was wildly beyond its potential but government spending kept pace, even as the Fine Gael/Labour opposition, the social partners and much of the media, yelled for even more.

In that context, the very last chart in Finance's presentation to the committee is the most instructive. This puts potential growth at more than 3pc until 2021. Other estimates are lower, and the EU Commission's admittedly harsh methodology puts it lower still, but we can already see that keeping to an annual 3pc rise in real spending will be huge task for the next government.

The ESRI raised the boom-bust tendency a few weeks before the Budget, saying it believed the economy was already close to potential and the Budget should be neutral, with no net giveaways. Its researchers think there should be budget surpluses from 2017, which is a couple of years earlier than the Government has in mind.

The pre-Budget estimates showed the government making use of the country's last year under the old rules to shovel large sums of money into distressed departments, especially health, by way of supplementary estimates. Such estimates are a sure sign that cracks are appearing the public spending process. Much of the extra money will represent permanent increases on things like staff, not just one-offs.

No one can be sure if the EU rules will have much force in long run. That depends on whether the single currency develops or stagnates. But we can expect the creditor countries to give them strong backing in the short-term.

Either way, the last few months demonstrated that the political forces which caused the Great Binge of the 1970s and the Great Boom of the 2000s are as potent as ever.

There were welcome signs of a better way of doing things in the run-up to this Budget but the political process will have to take ownership of them, not just wrestle with them, if we are not definitively to join that unhappy group of countries prone to serial bankruptcies.

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