Wednesday 21 February 2018

Got a billion to spare? Then let's fast-track deficit reduction

Politicians may be tempted to create building jobs or halt welfare cuts but such largesse could hit the buffers

Brendan Keenan

Brendan Keenan

THE whiff of pork that I mentioned recently is now as pungent as a barbecue next door.

The figure being bandied about is €1bn, which the Government might spend providing stimulus, or might leave untouched in our pockets. If it can get the budget arithmetic right.

That's the trouble with money. It is what the jargon calls "fungible": one euro is the same as another, and so is one billion of them. Where exactly the money will have come from, or where exactly it will go, will not be that easy to determine, even after the event. Something, though, is cooking.

A billion is an interesting figure. It was the estimated cash flow saving from the Anglo promissory note deal. A coincidence? Perhaps. The saving was not supposed to affect the deficit figures, but it does improve the background music if there is to be some largesse.

The issue seems to be that the deficit is better than had been expected. At the time of the Budget last December, the forecast was for net government borrowing to be 5 per cent of output (GDP) next year.

But 2012 turned out rather well, and now the forecast deficit is just over 4 per cent of GDP in 2014. Given that the forecasts made last December required amendment, the moving of the Budget to October this year will make the whole process of predicting next year even more tenuous.

It is terrible that so much hangs on such meaningless figures. Not only is GDP growth tiny, but its performance is subject to the kind of financial legerdemain we have seen revealed in the tax investigations into multi-national revenues.

That makes it a poor measure of Ireland's ability to service its debts and deficits. So many foreign entities are wriggling through so many tax loopholes that there is no longer any such reliable measure.

Yet GDP is the basis on which Troika bailouts, credit ratings and market borrowing costs depend. Every one per cent of GDP is about €1.5bn – real money when it comes to budget corrections for everyday folk.

So perhaps the Government is right to attempt to wriggle through any gap it can find in this terminological thicket. If 5 per cent of GDP was good enough last December, why should it not be good enough next December?

A siren song indeed. But that still leaves the question of what to do with a billion conjured out of the fiscal miasma.

There appear to be three options: 1) spend it on infrastructure; 2) use it to ease the spending cuts and tax rises (but mainly, it would seem cuts) in the next Budget; or, 3) as the EU Commission said last week, do nothing and have the debt fall faster.

Capital spending has its attractions; some of them even political. Public investment bore the brunt of the spending cuts, as it always does, and will have to be increased at some point if public infrastructure is not to crumble away.

In the last national bankruptcy, it was possible, five years after recovery began, to start increasing the capital budget from growing tax revenues. One doubts if it will be that quick this time. Resources will have to be shifted from current to capital spending. A billion would be a modest start.

It also has the attraction that it adds to GDP because it counts as investment, and so helps the measurement of debt, however dotty that measurement may be. It provides jobs immediately – although it may not add much to existing employment.

Unless chosen wisely, though, it may not add to national wealth in the long run. (As the search begins for hundreds of hidden Dublin cellars, common sense suggests – in the absence of convincing arguments to the contrary – that the Luas link line will subtract from national income in the end).

Of course this will be offset by the tax rises and spending cuts in the Budget, which would go ahead as planned. Using a billion to ease up on them would help maintain GDP, but the level of political hostility may not relate to the size of fiscal correction – just to the fact that there is any at all. And cuts there still will be.

The commission's advice/ instruction would seem to be the least attractive to the Government, but I wonder. At the present pace, it has been calculated that the deficit would be little more than 2 per cent of GDP by 2015.

That would make Ireland one of the most solvent countries in Europe on a "going concern" basis. Its public finances would look very much like Italy's – small borrowings, large debt, but without Italy's hidebound economy.

As the election approached, the Coalition could say: "Job done – are you going to hand it over to you-know-who?"

That seems to me more of a winner than a clatter of building jobs and a free ride for social welfare in long-ago 2013. But then what do I know?

Irish Independent

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