Tuesday 25 October 2016

Government should heed last week's useful advice

Published 20/09/2015 | 02:30

‘The Government is still borrowing to fund its spending. And every euro it borrows goes on top of the massive debt pile that already exists’
‘The Government is still borrowing to fund its spending. And every euro it borrows goes on top of the massive debt pile that already exists’

With less than a month before Budget 2015 is unveiled, both the public finances watchdog and the Paris-based OECD weighed in last week on how the package should be constructed. Both outfits continue to make the case for avoiding a return to the bad old "if I have it, I'll spend it" ways.

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Before getting into their views in more detail, let's cheer ourselves up a bit this Sunday morning.

For a very long time, there was nothing but bad budgetary news. It was depressing to write about it and, no doubt, depressing for readers to read.

Thankfully, and although things are (fiscally) far from hunky dory, there is some better news now.

The cheeriest development relates to the amount of cash that is flowing into the Government's coffers, and, more importantly still, the reason why that is happening.

Revenue is now growing strongly, helping to move the public finances back from the brink at which they teetered just a few short years ago. Better again, that is happening not because the taxman is shoving his hand further into your pocket - but because greater activity in the economy is generating more revenue.

The graph shows the improvement relative to peer countries. General government revenue includes all government income and is about one third bigger than the narrower Exchequer tax data (which still receive far too much attention).

Over the three years to the first quarter of 2015, Irish general government revenue increased by 16pc, one of the highest rates of growth in the EU 28 and far above the average of 6pc across the eurozone.

But having said that, the job of returning the public finances to a safe zone of sustainability is far from complete. The Government is still borrowing to fund its spending. And every euro it borrows goes on top of the massive debt pile that already exists, which is among the biggest in Europe as a percentage of GDP.

It is against that backdrop that the advice given to the Government last week needs to be considered.

The Independent Fiscal Advisory Council is a creature of the post-crash period. It is tasked with giving regular assessment of many aspects of how the public finances are managed. It does detailed and rigorous analysis of the numbers and the economic context. It gives its best judgment - and is not, as Minister for Finance Michael Noonan wrong-headedly claimed during his appearance at the Banking Inquiry, "really there to give a contrary view".

It is a serious body and its views and analyses have contributed to improving public understanding of budgetary matters.

While the tone of its pre-budget advice, published last Thursday, may have been more muted than its last analysis at the beginning of the summer, it continues to have serious concerns.

Three months ago IFAC deemed medium-term spending projections unrealistic, found that the underlying deficit reduction target would not be met and said that the Government was on course to break its own (and European) budgetary rules.

Another issue highlighted three months ago was the size of the intended increase in spending.

Under the rules, if governments want to ramp up spending beyond a certain ceiling, they must raise taxes. 'Tax buoyancy' revenues cannot be used - these gains from economic growth must be put into deficit and debt reduction. The Government's plan, IFAC said, was "against both the letter and spirit" of this expenditure benchmark.

Has IFAC mellowed over the summer?

Recent revisions to the GDP data now mean that the underlying budget deficit target looks like it will be met. As Prof John McHale, the academic who chairs IFAC, said last week: "The Government got lucky."

As such, he is more relaxed about the increased spending and tax-cutting package of €1.2bn-1.5bn that the Government intends to include in the Budget.

Although this columnist's view has long been that there should be no "giving back" of anything as long as the Government has to borrow to do so, the intended package is not very big.

More importantly, the Coalition has stuck to the €1.2bn-€1.5bn package it set out in the spring and has not succumbed to the temptation to expand it.

But if IFAC has relented on one front, it is no less concerned about most other issues it raised in early summer.

The most serious criticism is that the Government is increasing spending too fast. Last week IFAC repeated its explicit criticism that the current plan breaches both the "spirit and letter" of the rule.

This is damning.

The council again criticised "the absence of a realistic medium-term plan for the public finances" - in the coming years it is guaranteed that there will be pressures on public services as the population gets older. The absence of credible long-term expenditure ceilings remains a major weakness in the Government's Spring Statement.

Another area where management of the public finances appear lacking is risk assessment. As a small, open economy, Ireland is inherently at risk of being affected by trouble in the global economy.

Turbulence in China and emerging markets and the continued woes in the eurozone are all reasons for caution. At home, slower economic growth or a rise in the interest rates on sovereign bonds pose a real danger.

A similar sentiment came from the OECD's economic survey of Ireland released last week.

While noting that the Irish economy is strongly rebounding, spent plenty of time underscoring risks. To improve Ireland's fiscal position, it recommends that debt be reduced, in part by putting the gains from the State's exceptionally low interest rates towards that goal.

Echoing IFAC, the report states the need for longer-term projections on spending and to improve the expenditure control framework, especially for big ticket items, including health and public sector wage costs.

As with other aspects of economic management (covered in a column in the main section of this newspaper), the OECD says that things could have changed more - and faster.

That is a little depressing.

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