Sunday 25 September 2016

Just remember, the money is not all ours to spend

We don't have to wait for Budget Day to see if this Government is any different to its predecessors, writes Dan O'Brien

Published 27/09/2015 | 02:30

Michael Noonan and Brendan Howlin
Michael Noonan and Brendan Howlin

If budget matters bore you then the next three weeks will be hell. Speculation about which taxes are going to be cut and where spending increases will go will fill newspapers and dominate TV and radio debates. Only on October 13, when Michael Noonan and Brendan Howlin deliver the Budget speech, will the full details be revealed.

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Budget Day is less of a deal than it used to be. Since post-crash reforms have been put in place, the big bang of Budget Day is less spectacular. That is because more decisions are made earlier in the year and in a somewhat more planned way than the last minute, back-of-the-envelope way of even the recent past.

Most importantly, governments are now bound to set out the size of their budget packages months in advance, helping to insulate finance ministers from lobbying by vested interests and protect them from succumbing to the temptation to splash out as the unveiling approaches.

Because of this we have known since the spring that the package will be a stimulus of €1.5bn and that it will be split evenly between tax cuts and spending increases. This is small beer compared with many of the pre-election Budgets in the past and a mere fraction of the insane splurges before the 2002 election - the biggest ever packages.

The author of those Budgets, Charlie McCreevey, will forever be remembered for his "If I have it I'll spend it" comment. The current administration says that it utterly rejects that sort of "showtime" management of the public finances and it is altogether different from its predecessors.

But that is not entirely true. Despite all of the genuinely good news on the economy for over more than two years, it should be remembered that the Government still doesn't have it to spend it. It has one of the highest levels of debt of any government in the world relative to the size of the economy. It is adding to its debt pile by borrowing this year. It plans to borrow more next year. As such, all of the tax cuts and spending increases in the forthcoming Budget are being funded with borrowed money. Nobody should forget that money which is borrowed on your behalf by the Government is repaid, with interest, by your taxes in the future. So disabuse yourself of the notion that the Government will be "giving something back" in a few short weeks.

It should also be said that there is little economic logic for stimulating the economy now that it is already growing strongly. The sensible thing to do would be to stop running deficits and start running surpluses, so that the debt pile can be reduced and so there is scope to stimulate when the economy flags in the future, as it eventually will.

Running the public finances as happens in well-run countries in northern Europe - the Swedens, the Finlands and the Denmarks - would make most sense. Those countries all took in considerably more revenues than their governments spent in the year up to the Great Recession. That allowed them avoid the sort of crunching spending cuts and income-slashing tax increases that post-crash Ireland had to impose to avoid bankruptcy.

For anyone who says it is not possible to run large budget surpluses in good times, look at Nordic fiscal history in the years up to 2008. Despite suffering a second great fiscal crisis in 30 years, it is very clear that our double trauma has not turned Ireland Nordic. If public opinion and the political class are both largely comfortable with taking more risk than is necessary with the public finances, then so be it.

While there is no case for stimulus on one level, that does not mean there is not an economic logic for more public expenditure in some areas. The best way to do that would be to reallocate spending from areas where it has least benefit to more growth-friendly areas. Politically, of course, there is no chance of that happening. Taking anything from anyone with an election around the corner is a non-runner.

An area where there is a strong case to increase spending is investment in infrastructure. As it happens, we will not have to wait until October 13 to know how much the Government plans to spend on investment and where the cash will go. On Tuesday the Coalition is scheduled to launch, with lots of fanfare no doubt, an investment plan for the next half-decade. There is a good dollop of politics in launching the plan before the Budget. Politicians bearing gifts is a good news story. Instead of giving all the good news on October 13, spreading it out a bit can only be electorally beneficial, even if it could validly be said that a Government with less than six months of its mandate left has no business making spending commitments over five years.

As always, there is a concern that cash will be allocated to projects that do not maximise bang for the taxpayer's buck. It will also be interesting to see if political considerations result in projects benefiting marginal constituencies, where Government TDs in trouble get the nod ahead of more sensible ones.

All that said, long-term planning for capital spending priorities is needed and it is to be hoped on Tuesday, spending is prioritised using only rigorous cost/benefit analyses, as has too infrequently happened in the past. And because that past has had its share of depressing bouts, it is worth recounting briefly a history of public capital spending over the past 20 years.

As the Celtic Tiger was in its infancy, public investment was quite meagre, standing at a little under €1.3bn in 1995. As cash rolled into the Government coffers in subsequent years, the investment budget soared, more than quadrupling by election year 2002.

But when a huge pre-election give-away coincided with a mild slump in the economy at that time, the public finances went south rapidly. As often tends to happen in slumps, investment spending gets cut most - not building a new road is infinitely easier politically than cutting people's welfare benefits or public sector pay, two items which account for half of total public spending in Ireland.

And so it was at that time. In the years to 2005, the capital spend remained at a little over €5bn. But then the fever of the bubble years took over. With the 2007 election in the offing, the spigot was opened. In 2008, €10bn was spent.

But as the risk of having to go cap in hand to the IMF rose, a massive reversal then took place. By 2013, the investment spend was one-quarter of its peak, by a very long distance the deepest cut of any area of expenditure.

At least some of the cuts to the capital spending budget actually made sense after the crash. Before the crisis, Irish spending as a share of GDP was far above the EU average. By this measure there was scope for more modest investment levels. Also relevant was the decline in economic activity, which meant capacity constraints eased almost everywhere. Finally, as some of the really big projects were being completed, most notably the motorway system, the spend would have fallen back of its own accord.

But there are clear needs now. Replacing and upgrading critical systems is required. Depreciation takes its toll. The plan to be unveiled on Tuesday will tell a lot about how these issues are to be addressed, and how different this Government really is from some of its profligate predecessors.

***

On a separate, but fiscally-related matter, there was good news on Friday from the independent public finances watchdog. The Irish Fiscal Advisory Council, which has been having its share of spats with the Government, made two new appointments to its five-person team. Both additions are hard-thinking and tough-minded types, who will not shy away from a fight with any government.

Michael Tutty was a mandarin in the Department of Finance until 2000, where he was never shy about exhibiting his independence of mind or challenging Charlie McCreevey on the issues of the day. His insider knowledge will be valuable to a council otherwise comprised of outsiders.

The second appointment is Seamus Coffey, an economist at UCC. He has been among the most engaged academics in public discussion and brings a welcome rigour to debate on economics. He calls it as he sees it and doesn't court popularity by saying what he thinks is fashionable.

Sunday Independent

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