News Comment

Wednesday 26 October 2016

We may yet pay a heavy price for Government seizure of leprechauns' pot of gold

Published 15/10/2016 | 02:30

Minister for Jobs, Enterprise and Innovation Mary Mitchell O'Connor pictured at a press conference after the Budget was announced last week Photo: Laura Hutton/Collins Photo Agency
Minister for Jobs, Enterprise and Innovation Mary Mitchell O'Connor pictured at a press conference after the Budget was announced last week Photo: Laura Hutton/Collins Photo Agency

One good thing to be said about this week's Budget: it made a 97-year-old acquaintance of mine laugh. He had just been told that his pension would go up by a fiver a week, but not until March. When you're that age, and not very well, that's funny.

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In general, though, no-one had much good to say about the Budget, and hardly anyone was laughing. There is a theory that a budget which looks bad on the day often looks good six months later, and vice versa, but it is hard to see that being true of the 2017 effort.

This is all a bit alarming. The Budget was as generous as could be - and quite possibly more generous than it ought to have been. As the politics unrolled, a €500m net benefit to the citizens doubled to a billion and then the famous drawer at the back of the Department of Finance cupboard yielded another €300m.

Thanks to the Irish Fiscal Advisory Council, which has the arduous task of making sense of government accounting, we know that this is not the end of the story.

The shovelling of money backwards and forwards to make the current 12 months look good means that spending rises and tax cuts (mostly the former) of around €2.5bn have been allocated since this time last year.

So why isn't everyone laughing and cheering? That is the first cause for alarm. A Budget which is probably more than prudence would allow - or even than EU rules permit - appears to have brought the Government no political advantage. Something - either politics or sound public finances - is going to have to give.

We know which won that tussle in the past, and that was in the comfortable old days of the two-and-a half party system. Even in the present fractured confusion, it is hard to believe we would head down the same road, even before we have recovered from the appalling crash on the last bend. But an analysis of budget trends suggests that is indeed what we are doing.

There was surprisingly little comment on the Government's seizure of the leprechaun's pot of gold. This was the statistical fairy which increased Ireland's official measurement of the economy (GDP) by more than 20pc, even though nothing had changed in its real output.

Not only are the Budget targets the same as when GDP was officially one quarter smaller; there has even been some slippage on that. Because Ireland's national debt is so big, the best figure to look at may be the 'primary balance' - the state of the public finances before €9bn in debt interest costs is handed over to the bond markets.

It is worth reminding ourselves - or torturing ourselves with the fact - that tax revenues will exceed ordinary government spending by €2bn next year.

With normal levels of debt, that would be a comfortable position for national finances, but it is reducing the abnormal Irish level of debt very slowly - more slowly than was originally announced.

Even the present progress is possible only because €500m of new spending has been shovelled forward into 2018. Despite this, we are asked to believe that the primary surplus that year will increase to the 2pc it was supposed to reach in 2017.

As the crisis has waned, so has the rate of progress. In 2013, the primary balance improved by a massive 1.5pc of GDP. The annual change now 0.2pc. The first question is whether this is fast enough, given Ireland's level of debt, and the second is whether it can even be achieved on present trends.

The answer to both questions is: probably not.

If you believe in leprechauns, as the Budget chose to do, the debt is down to 75pc of GDP. In reality, it is still almost an entire year's national income. As for the second, next October, the Minister for Finance will find him or herself in an even tighter corner, which is why many political observers see this as an election Budget.

There is some Fianna Fáil wistfulness about whether they should have held the Government to the original half billion package and watched it struggle, instead of pushing for just about the most expensive item of all - that increase in pensions.

Its doubters can console themselves with the thought that as an election Budget, it does not seem to be working - although it remains to be seen whether it does much for Fianna Fáil either.

This is the second cause of alarm. It is not just a matter of cowardly or irresponsible politicians. One of the most corrosive effects of 15 years of boom and then bubble is that budgets are still seen as a kind of ATM, where the only point is how much everyone gets; instead of something to be feared, as was the case in the decades before that. There seems to be no votes in good economic management.

This is another effect of the crash. People have lost a great deal of income, are understandably angry, and are determined to get some of the financial pressures off their backs. In reality, more financial pressures are piling up for the future, particularly in health, pensions and public pay; not to mention the capital investment which will have to be provided at some stage.

The Budget continued the 20-year strategy of setting modest targets, exceeding them and then pocketing some of the gains in the form of higher spending and tax relief. It looks good when things are going well, but its softness can be cruelly exposed when things go wrong. What with Sterling and Brexit, we may see that demonstrated again before long.

Irish Independent

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