Friday 2 December 2016

In 'fiscal space' no one can hear you scream

This campaign has been ruled by unfamiliar jargon which is unfair and confusing to the electorate, writes Colm McCarthy

Published 07/02/2016 | 02:30

DUBLIN’S FINANCIAL CENTRE: Even if things go well in Ireland, there is no guarantee that the next year or two will not see a re-run of the 2012 sovereign debt crisis. Photo: Shahid A Khan
DUBLIN’S FINANCIAL CENTRE: Even if things go well in Ireland, there is no guarantee that the next year or two will not see a re-run of the 2012 sovereign debt crisis. Photo: Shahid A Khan

The early days of the election campaign have been dominated by controversy about something called 'fiscal space' which must have had voters scratching their heads. What is this apparently precious commodity, and how large is Ireland's newly-discovered endowment? The phrase is borrowed from the vocabulary of debt sustainability analysis and rarely escapes the statistical appendices of IMF reports. It is a little unfair to inflict this unfamiliar piece of jargon on a blameless electorate.

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In plain English the key question is the following: can the proceeds of future economic growth safely be distributed in advance in the form of promised tax cuts or expenditure increases? The answer is that it all depends. If the future growth is guaranteed and if the country faces no great penalties for getting it wrong, the concept of 'fiscal space' has some real meaning: the incoming government could prudently contemplate tax giveaways and extra spending. But if the future economic growth is uncertain and if the government already has high debts and no capacity to borrow its way out of a miscalculation, it is not a good idea to drone on about 'fiscal space'. It is not an undrawn deposit in a bank somewhere.

Future economic growth in Ireland is highly uncertain for various reasons and the government has heavy debts, not all shown on the balance sheet. It is only a few short years since it was unable to borrow at all and had to rely on non-market lending from European institutions and the IMF. Accordingly, it is not a good idea to distribute the proceeds of assumed future growth in advance. If the growth does not materialise there may be no room for manoeuvre and no option but to reverse engines. Countries which have retained their own currencies, such as the United Kingdom, can have more latitude: their central banks are free to create liquidity to finance the government (within limits). Countries with low debts will also be able to borrow even if they get things wrong for a few years. In contrast, a country with heavy debts and lacking its own currency needs to be extra careful if it wants to retain the ability to finance itself in the markets.

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