Noonan has no clothes on growth, said the mandarin
Published 18/10/2015 | 02:30
Who do you believe, the mandarin or the professor?
Last Wednesday morning, Prof John McHale headed for RTE's Morning Ireland. His mission was to alert the nation to a danger. He felt that the Government had pulled a fast one. In the process, he nearly torpedoed the Budget.
The professor is chairman of the Fiscal Advisory Council (FAC), the watchdog reluctantly set up - by the Cabinet under pressure from the Troika - to give independent judgments on government forecasts and keep them on the straight and narrow.
Prof McHale is a political appointee. He was behaving in a way that political appointees are not supposed to do, showing signs of independence of his patrons.
His appearance on Morning Ireland had echoes of another professor, Central Bank Governor Patrick Honohan, who revealed to a stunned nation in 2010 that his political patrons were plotting a bailout deal with the IMF.
At the time, Taoiseach Brian Cowen and Minister Brian Lenihan were reported to be livid. It is totally counter to Ireland's crony culture that such political appointees stab their masters in the front.
McHale felt that Finance Minister Michael Noonan and the mandarins had made a monkey of him. The FAC had cleared the Budget a few weeks ago on the basis that the extra €1.5bn available in this year's Budget was prudent. So the FAC and the nation were initially deeply sceptical, when, just three days before Budget Day, the Government miraculously discovered another €1.7bn in the kitty.
A sudden tax windfall (normally destined for debt repayment) was going to be splurged all over the economy. The FAC had not been told about such well-plotted extravagance when it gave Noonan's original package the all-clear. McHale was the victim of an old-fashioned stroke.
McHale headed for Morning Ireland. He shattered most of us with his independence. He explained that the new Budget figures were off the charts, were unacceptably expansionary, raising fears that they might force the watchdog to bark at its next meeting.
He made one mistake, when he suggested that Noonan and his sidekick, Brendan Howlin, might be breaking European rules.
The mandarins went straight into overdrive. Within minutes, they were working on a denial. They had already received approval from Europe. They briefed against the professor. McHale was wrong.
McHale had made a technical error, probably because no one had told him that the Government had already done a deal with Europe, although his Morning Ireland interview left room for that possibility.
But he was up against the might of the mandarins' spinners. All day, they were rubbishing the professor. In a damning remark, dripping with patronising sarcasm, Michael Noonan told Fine Gael TDs that while he was "happy" for the Fiscal Advisory Council to make public statements about the Budget, "but where people have facts and the facts are wrong , we are happy to clarify them".
Ouch. It must have been painful for a distinguished academic to be contradicted on evidence by a primary school teacher. The gentle professor of economics was dealing with hardened professors of spin. They caught him on a minor matter and resolved to massacre the main message. The watchdog was under siege.
McHale, on the defensive, struggled to clarify. In the main, the media obliged the mandarins with their well- spun stories that McHale had been forced into a humiliating climbdown.
McHale was behind on points until he reappeared on Newstalk's Breakfast Show on Thursday. He again clarified his mistake but stuck to his guns. He saw amber lights flashing everywhere in the revised Budget. It was dangerously expansionary. A new higher spending base had been set for 2016; we had no guarantee that taxes would remain buoyant. The question this weekend is whether the professor's patent objectivity has overcome the establishment's relentless spinning against him. He was playing senior hurling against the all-Ireland champions.
Of course, the stroke pulled by the Government was key to the original Noonan master plan to buy a November election. Miraculous windfall tax returns on the eve of the Budget provided extra funds. Suddenly supplementary budgets for key departments spouted, releasing cash galore for favoured voting groups. A massive short-term fix would fill peoples' pockets and guarantee the Government's return.
Both McHale's intervention and Kenny's U-turn about the election date have destroyed Noonan's carefully crafted strategy. We are now facing a long run-in to a February poll. By then, there could be a few more brave McHales and unseen political minefields. The Budget could be a nostalgic memory.
And so could the wildly optimistic growth figures used to support the Budget arithmetic. In the spring statement, growth of 3.8pc was forecast for 2015. By Budget Day, it had rocketed to 6.2pc, a fantastic 72pc increase. Ironically, the minister sought to give credibility to the dramatic spike by insisting that it was "endorsed by the Irish Fiscal Advisory Council". A day later, he was dumping on them. He went on to signal a forecast growth rate of 4.3pc for 2016, again "endorsed by the FAC"! These independent bodies have their uses. Finally, he insisted that growth "is expected to average 3pc per annum after that." Pie in the distant sky.
If the growth forecast can rise by 72pc in six months, then the spring growth guess was haywire. If the unexpected can happen on the upside, it is equally possible on the downside.
Especially for Ireland, a nation that is living on expectations of continued global growth, a prospect being discounted by powerful bodies like the IMF. If growth falls below the current meteoric expectations, then the tax take falls. If the tax take falls, either taxation rises or expenditure is cut. But of course, all that will happen after an election.
Noonan missed a trick. Once again, he has ducked a chance to broaden the tax base. His consistent justification of property tax and water charges as "broadening the tax base" are nonsense. They mostly hit the same middle-class people who are already in the net. Last Tuesday, he rightly reduced USC, but actually narrowed the tax base in the process.
There is an obvious way he could have broadened the base and still paid out all the benefits. He could have tackled the sacred cow of Irish taxation, the multinationals. He bottled it. Most of us rejoice in our multinationals and delight in their contribution to employment. Sadly, they pay minuscule amounts of tax, by taking advantage of loopholes in tax havens in sunny faraway islands.
Ireland plays footsie with the global tax exploits of these powerful companies. The situation where some well-known global giants make billions in profits but pay taxes in thousands is farcical. We could broaden the tax base by requiring them to pay a reasonable amount, rather than shift their profits to Bermuda in artificial transactions, set up purely to avoid paying taxes. We have the powers. Why do we not use them?
The amounts channelled through Ireland run into billions. The Government could build hospitals, abolish USC, reduce property taxes, raise childcare and fulfil multiple social objectives if they would fairly tax this thriving part of the economy. If the offending overseas companies' profits reflected reality instead of fiction, we could reduce the 12.5pc profits tax rate to single figures. Instead, they are allowed to pick their own profits. Tax is calculated on a fraction of the real profit.
Noonan's Budget was cleverly pitched for a November poll. It was smart- ass economics packaged to snooker his political opponents. No member of the opposition could answer the media commentators' favourite question - "What measure in this Budget would you not have done?" - without offending a key voting group . It treated the citizens as fools who cannot see the dangers around the corner. It relied on the mandarins to spin the fable that we are out of the boom/bust cycle. It sold a pass to the professor who had the guts to challenge his patrons' sleight-of-hand. John McHale may have made a minor mistake, but he has done the nation a serious service.