Saturday 22 October 2016

You cannot change economic reality with an extra dose of jargon

Published 06/02/2016 | 02:30

Charlie Haughey
Charlie Haughey

Come back Charlie McCreevy, all is forgiven. Well, almost all. At least you could understand what Mr McCreevy meant. Well, most of the time.

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His best-remembered phrase is, "When I have it, I spend it." There's no doubt what that means. On the other hand, even the most articulate economists had trouble this week explaining 'fiscal space'. In fact, both mean much the same thing.

We might call it 'Keshonomics'. When the Long Kesh prison got a particularly bad name, what with internment, dirty protests and so on, the name was changed to the much less intimidating 'Maze'. (Both are real places in the vicinity).

Of course, reality inside the H-blocks did not change under a different name. Nor can economic reality be changed with an extra dose of jargon. The accusation in both cases is that they are attempts to hide reality.

Politicians seeking election always do that, but in this case things genuinely have got more complicated. There is a new set of EU rules which are very hard to understand and impossible to explain.

There is an independent Fiscal Advisory Council, which is a guardian of the rules, and a Central Bank anxious to show its independence after its craven performance during the bubble years. There is even a President who, in some strange way, occasionally veers into the area of the political arena to a greater degree than his predecessors.

All of which is particularly difficult for the governing parties. They have the books - the ones they say they did not see properly before the last election. So their plans merit extra scrutiny and they have been forced into a bout of Keshonomics.

It is tricky territory. The €12bn "fiscal space" outlined by Finance Minister Michael Noonan implies a real fall in the value of welfare and benefits and severe pay restraint over the life of the next Dáil. Of course, this is not Fine Gael policy, still less Labour's, but if they are not going to do that if returned to government, then that number does not hold up.

In its economic plan published on Thursday, Fine Gael allowed for some such increases, reducing the space to €8.6bn over five years. One thing we all understand is that, in politics, the really good times are just a bit further away. For the first three years, the new government's space will be little more than €1bn a year.

The fiscal council thinks it will be even less, partly on the reasonable assumption that public sector unions will not settle for the Lansdowne Road agreement and pay rises of less than 2pc a year. The strike notices are already being prepared.

We must blame Europe, not the local politicians, for the worst jargon, things like the 'medium term objective' and the 'expenditure rule'. Important things. In layperson's terms, the Coalition hopes to get another €1.5bn a year from 2019 if it gets close enough to meeting the objective. That 'hope money' is fully spent in the plan.

But there is no getting around the expenditure rule, although few would get their heads around calculating it. The result, though, is clear. Spending increases must be held to 2pc a year, no matter how much tax revenues boom. There can be no more clever tricks like last year's backloading of €1.5bn of future extra spending. This is one to watch.

Fine Gael deserves credit for at least dealing with this mind-numbing stuff in all kinds of boxes and charts in its plan. But simple words need attention too. Half its fiscal space - almost €4bn - will be used up abolishing the USC.

Nowhere are there any words, simple or complicated, explaining why that is such a good idea. But in the next paragraph, the party commits itself to a "broad" tax base. How that fits with abolishing the USC is just as difficult to understand.

Then there are the deficits - three different kinds nowadays. It was simpler in the old days, when Garret FitzGerald would lambast Charlie Haughey over the size of the current budget deficit. Few understood what that was either, but it put CJ on the back foot.

Now there is the general government deficit and the structural budget deficit as well. The thing is, all three are still deficits. Under the Fine Gael plan, it will be 2021 before they are in balance or surplus - and that depends on strong growth over the whole period.

This is where the politics comes in. Is that good enough, or does it leave the public finances too vulnerable to a serious downturn? But the argument is being conducted between all the political parties on one side and bodies like the Fiscal Advisory Council, Brussels - or even the President - on the other. There are no fiscal hardliners among the parties themselves.

But don't be fooled. If there is one thing Ireland is famous for, it is fiscal correction. History teaches that the second half of Mr McCreevy's dictum holds true for all three of the past governing parties - if they don't have it, they don't spend it.

Perhaps the only difference is that, next time they don't have it, they'll change its name.

Irish Independent

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