Friday 21 October 2016

Unhealthy tendency to binge is reflected in boom and bust Budget

Published 15/10/2015 | 02:30

Michael Noonan and Brendan Howlin
Michael Noonan and Brendan Howlin

Are we a nation that doesn't mind suffering bad economic hangovers as long as we can enjoy budgetary binges whenever we get half a chance? Or, alternatively, is our political class unable to inform and lead the nation so that we lessen the chances of good times getting out of hand, with very painful consequences afterwards?

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Put another way, is Ireland's extended history of boom and bust a reflection of wider society or is it a result of bad government?

I don't know the answer to that question, but Tuesday's Budget highlighted it as one that needs answering. Before pondering it a bit more, let's dispel any notion that Tuesday's Budget was prudent.

This year, according to the Government's own figures on Tuesday, it will spend a lot more than it takes in. To be precise, the gap will be €4,385,000,000. Or, put in a less mind-addling way, almost €1,000 for every man, woman and child in the country.

To be in the red to this extent when Ireland is the "fastest-growing economy in Europe" and has the wherewithal to move back into the black makes little sense. To be running a deficit of that size when the Irish State is one of the most indebted in the world makes even less sense. Making still less sense is that the Government intends to narrow the gap only to €2,765,000,000 next year.

If any of the long list of risks that exist in the global economy materialises and knocks the Irish economy off track there will be precious little leeway to avoid a rapid return to austerity.

Running budget deficits in periods of strong economic growth, as is happening now, is something that very few economists support or defend. But what was most shocking about the Budget was the out-of-the-blue announcement to ramp up spending - this year and in future years (the drier detail of this is discussed below).

The last minute change is causing many economists great concern. Among their number is Prof John McHale, chairman of the independent budget watchdog. He appeared on RTE's 'Morning Ireland' yesterday. If not quite as significant as the appearance of the Central Bank Governor, Patrick Honohan, on the same show during the early days of the bailout five years ago, it was an important moment. For the head of the Irish Fiscal Advisory Council to make an unscheduled address to the nation less than 24 hours after the unveiling of a Budget is unprecedented. It gives some indication as to the level of concern that at least some of rules which have been put in place to stop fiscal recklessness are not being respected.

The council will report next month after it has done a detailed analysis of the full set of Budget 2016 figures, which, incidentally, it confirmed yesterday had not been supplied to it when it was doing the pre-Budget assessment of the fiscal position that it is statutorily tasked to do.

Potentially more serious is Brussels' reaction. It seems unlikely that the Eurocrats who police the single currency's budget rules were informed of the sudden decision to ramp up spending. They will make their assessment next month too. If they find that rules have been broken, the Government here could face the same sort of pre-election reprimand that the Spanish government is currently facing for its budget, just as it begins its re-election campaign.

This is a grim saga. The days of "If I have it, I'll spend it" were supposed to be over. Members of the Government have repeatedly trumpeted their supposed prudence. The Taoiseach has said that there will be no more "showtime" pre-electoral spending splurges.

Despite this rhetoric from both coalition partners, Budget 2016 shows that they only talk the talk, as became evident last weekend. On Saturday, the Government published a short document appearing to suggest that it would spend considerably more this year and in the future than it had been promising over many months. The scale of the change was confirmed when the full set of Budget data came out two days ago.

The changes are illustrated in the graphic. Last year, at Budget time, the Government said that in 2015 it would spend €63.6bn (excluding interest payments on its own debt). The actual figure will be €3.5bn higher. The ramped up spending will be of the same order of magnitude next year and the year after.

This Government can get away with this mainly because its total revenues this year have turned out to be €3.7bn higher than it expected at Budget time last year. The important point here is that higher than expected revenues, some of which look as though they might be one-offs, are being used overwhelmingly to fund more spending, rather than to balance the books.

If bubble-era governments have been rightly slated for their if-I-have-it-I'll-spend-it approach, this Government doesn't even have it to spend. Everything that was "given back" in the Budget will be borrowed and future taxes will be used to pay the interest.

All this brings us back to why the Government has gone down this path and why very little of the opposition reaction has been to make the case for moving to a budget surplus while the sun shines on the economy. It may be that the political class, which nobody can accuse of being out of touch with the electorate (thanks to our very unusual voting system), believes that the nation's attitude to economic management is much the same as it is to alcohol - an unhealthy tendency to binge.

If that is the case, then convincing people of the benefits of fiscal restraint and prudence is a lost cause. Leadership is always important, but even the most gifted leaders cannot bring those they lead to a place that people have no interest in getting to.

Alternatively, it could be that politicians underestimate the electorate and believe that the only way people can be made to warm to a political party is if it is "giving" them something that impacts on their personal finances. Until such time as a political party makes Northern European-style prudence a central plank of its platform, it probably won't be possible to know for sure what people really want.

Irish Independent

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