Monday 19 March 2018

Forecasting what will win out: prudence or politics

Brendan Keenan

Brendan Keenan

'TAPIOCA futures weaker'. Bet that made you sit up and take notice. In fact, it was an example of how not to do it in a 'Financial Times' newsroom campaign many years ago to improve the standard of headlines.

I felt a bit sorry for the guy, or gal, who produced it. After all, what are the options if you are covering the tapioca market? But things have improved since my time. The newly-designed FT came out tops in the headline stakes on British Chancellor George Osborne's autumn financial statement: "Osborne swaps the axe for tax."

Mr Osborne was forced to row back on plans to scalp working tax credits which, as this column noted some time ago, are expensive, but effective, in doing things both Right and Left advocate - making work attractive and reducing poverty.

So there had to be new taxes to cover the shortfall. But not all of it. I was struck by analysis from the Office of Budget Responsibility (OBR) that the changes meant government borrowing would be £20bn (€27bn) more over the next five years than had originally been planned.

It was not so much the figure that was striking - although it was striking enough. The OBR calculated that the new statement implied real spending cuts would be less than two-thirds of those delivered over the last parliament, and about a third of those pencilled in by the previous, coalition, government in March.

What really hit home was to see such politically charged comments appearing almost immediately after the statement - calculations which clearly imply that Mr Osborne was doing the Tory talk, but not the Tory walk.

This is a new game, where finance ministers know that what they say they can be authoritatively contradicted, and things they prefer not to say pointed out.

Even so, one might not have paid too much attention (although the Stormont agreement means an even bigger spending relaxation in Northern Ireland), were it not for a happy coincidence. The British statement, which covers spending over the medium term, was on November 25. A day later, our equivalent of the OBR, the Irish Fiscal Advisory Council (IFAC), produced its assessment of the October Budget and threw an even larger lump of political fat into the fire.

Both bodies were formed around the turn of the decade, but with somewhat different origins and remits. David Cameron's Conservative Party made an election promise to set up an independent body after it became clear how imprudent Gordon Brown had been with the public finances.

Ahern recklessness produced no such plan from Irish political parties. The council is a child of the troika, although such bodies are now a general part of the Eurozone maze of fiscal scrutinies.

Not surprisingly then, the two organisations have different relationships to the budgetary process. The OBR has a wider remit. It does five-year forecasts, as well judging the government's performance against its fiscal targets and scrutinising the Treasury's costing of tax and welfare spending measures. It is sufficiently inside the system to enjoy the impact of producing its assessment within hours of the statements.

The Irish council does a similar job on Budgets and the annual Stability Programme report, but with more of a lag. It does not have an official brief to do forecasts, but it is required to endorse the Department of Finance's forecasts and the Budget could not go ahead if they were not endorsed.

These are short-term forecasts, and it is usually easy enough to agree on them. In last month's assessment, IFAC complained - again - that there aren't really any medium term forecasts for it to comment upon, or meaningful spending targets. "Government's projections from 2017 onwards are based on mainly technical assumptions and do not present a realistic picture of the public finances over the medium term," it said.

Despite government refusal to tell us what it thinks may really happen, the council still managed to light a few fires with its conclusion that there will be little money for the next government to play with. That is certainly politically charged in the run-up to an election because it will be used against any party promising to raise spending and cut taxes, which all of them will be minded to do.

At times I have felt I should revive my ten-year old joke; that in Ireland it is not Boston or Berlin, but Ballymagash - an imaginary place where the rules of arithmetic do not apply and one can believe three impossible election pledges before breakfast.

In more recent months, however, it has begun to look as if the politicians will decide to be more circumspect. But the electorate may be even more impossible than usual; demanding fiscal responsibility as well as tax cuts and more spending.

Even if politicians think, not unreasonably, that voters will plump for goodies in the end and they go for a promise gallop as the finishing line approaches, the media has IFAC's figures to challenge them, and the EU spending rules to bamboozle them.

There does not seem to be much disagreement about the council's conclusions. In his weekly blog, economist Tom Healy, of the trade union sponsored Nevin Institute, complained that IFAC concentrated too much on the limits to spending, and not enough on the scope for higher taxes, but not about the dangers of Ballymagashonomics.

So that's all to the good, then. Irresponsible politics, whether Brownite or Ahernist, have been curbed by the creation of external rules and independent bodies. No more pigs in pokes and snake oil in bottles. We know what is required for sound public finances and we will get it, whether we like it or not.

I wonder. This external oversight could also be a recipe for irresponsible politics of another kind. Politicians may be constrained, not just from being foolish but from being political - from taking widely different views on spending, taxation and distribution within the parameters of sustainable public finances. They may concentrate on vote-garnering gimmicks within the permitted "fiscal space".

In theory that need not be the case, although the EU expenditure benchmark looks a very dubious piece of work in the context of combining prudence with proper politics.

So it was encouraging to hear the Tanaiste say that the key plank in Labour's manifesto would be, not the deficit, but the size of the public sector.

This most central of question makes only fleeting appearances in Irish politics. Chancellor Osborne's party has a specific target of shrinking the figure on Britain to the smallest in western Europe - although as he has discovered, it's not so easily done.

I cannot see any Irish party campaigning for a smaller public sector, relative to the economy, but it would be a considerable improvement if they would at least say how big they think it should be.

That would create political space to debate important choices, now that the watchdogs stand guard on the fiscal space.

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