Wednesday 19 September 2018

Brendan Keenan: Donohoe singing a new song but is it the same old tune?

Minister for Finance Paschal Donohoe pictured at a press conference on the Summer Economic statement. Photo: Gerry Mooney
Minister for Finance Paschal Donohoe pictured at a press conference on the Summer Economic statement. Photo: Gerry Mooney
Brendan Keenan

Brendan Keenan

'Lyrics by Paschal Donohoe; to a traditional tune.' That might be a good label for the seasonal entertainment that is the summer economic statement. There are a lot of fine words in this year's production, but many echoes of years gone by.

The most obvious is the strange fear of running a budget surplus displayed by finance ministers of every hue since long before summer statements. The present incumbent has brought this to a fine art, budgeting for a deficit of one tenth of one per cent of national income.

This is as near to zero as it is possible to get in practical terms. More, the deficit has been falling each year by the same minuscule amount, which is as near to stationary as it is possible to get.

Surplus phobia appears to be based on the howls for more spending and/or tax cuts which would follow any sign of unused money. But the howls have begun already, despite lots of clever wordplay to prove the cupboard is bare.

My favourite lyric was the one which said the various "moving parts" identified in the statement "will be considered as part of the overall fiscal arithmetic to be updated for Budget 2019 in October". And what a lot of moving parts there are.

A rev counter might be needed to decipher the impact of EU rules on fiscal policy. The much-touted "expenditure benchmark" (much feared a few years ago because of its possible restrictions on government spending) is now a fount of generosity. The benchmark would permit almost an extra €1bn on top of the €2.8bn calculated as available by the Department of Finance.

The idea of targeting actual spending as a measure of prudence always seemed a good one, and it is the official target for Ireland. But it was not supposed to produce this kind of result.

The new Left, in the shape of Sinn Féin and Labour, have spotted this €900m window of opportunity and, like the comic character of old, Arthur Daly, want to jump right through it.

If the rainy day fund were abolished as well, as recommended by Sinn Féin, there would be €1.4bn to play with. That buys a lot of election manifesto promises - a thought that will not be lost on others.

The rainy day fund is new, and very tricky. It appears in the accounts as capital spending, which is fair enough since it provides an asset, just like a new road or hospital. Except that it is a financial asset; created instantly on the government books, unlike a hospital.

This point was picked up by Labour's Joan Burton, who argued that there is no point in saving like some bachelor farmer (my words, not hers), when the money could provide productive investments which would add to economic growth.

It is not at all clear that putting another billion into the 2019 capital budget would do anything for potential growth. Quite the reverse, if the torrid experience of 2002-8 is anything to go by.

Creating productive assets is a slow and painstaking business. It has been left to the employer's body, Ibec, to point out that the billions being trumpeted by the minor opposition parties and some interest groups to solve the housing shortage are of little relevance because there is no building industry capable of spending it.

Even if there were, there is insufficient physical, planning and financial infrastructure to allow the work to start.

The €90bn committed to capital spending over the next five years ought to be more than enough for the economy to absorb efficiently. There are bottlenecks and blockages hampering productive investment in other areas besides housing.

Another familiar refrain in the statement tells us that every euro invested will be scrutinised intensely to see that it is providing a sufficient return but there is very little evidence that it was so in the past; either in information published before investments are made, or analysis of the results afterwards.

Then comes the Greek chorus of promises that capital spending will be protected if growth falls below the - not so much optimistic as cheerful forecasts. We all know the words to that one.

With with more than €100bn of money committed to the National Planning Framework, it would offer easy pickings in hard times. Despite the recovery, those shortages and bottlenecks show how much better the economy's prospects would be if the last set of promises to protect capital spending had been honoured. The pressures on current spending are intensifying. On a rule of thumb, the 14pc rise over the past three years complies with the criteria on rising national spending - although the budgets fail the test on debt reduction. Budget 2019 will follow the same path no doubt, but spending in the past 12 months is up 7pc and the health budget is expanding by 10pc annually.

The fiscal opera is never exactly the same as previous productions.

Now, the priority should be investment rather than incomes, with money, proper planning and only as much politics as will not, as in the past, waste most or all of the money.

This is a difficult sell, and the confidence and supply arrangement makes the politics anything but traditional.

Mr Donohoe took to the airwaves, and it only mid-summer, to insist that he was not for turning and neither was the Taoiseach. But the show isn't over until - careful now - until the well-formed finance minister sings in October.

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