Tuesday 23 January 2018

Hangovers will follow pre-election celebrations

Government giveaways now will make it much harder when the going gets tough again, writes Colm McCarthy

Minister for Finance Michael Noonan
Minister for Finance Michael Noonan
Colm McCarthy

Colm McCarthy

The Government will take two bites at the budget cherry this year with a trailer in the form of a 'Spring Statement' due on the 28th of this month, and the full movie in October.

The Spring Statement will focus on the apparent willingness of the European Commission to see Irish public spending rise next year by more than was provided for in the EU's budget rules. Thus the deficit next year will fall by less than might have been possible, which will be spun as a success for Irish negotiators. The best level of the deficit, it would appear, is the maximum that can be arranged.

Today's Millward Brown poll reports the preferences of voters on two important economic issues, pay in the public and private sectors, and the alternatives for tax reductions. Government ministers have been urging private sector employers to look kindly on the pressure for pay increases in the private sector, where there is at last some evidence of a more broadly-based recovery. Making voters happy using someone else's money has obvious attractions for government politicians in a pre-election year. However, the unemployment rate remains at 10pc and the recovery is in the early stages.

The question posed by Millward Brown was: Do you think there has been sufficient improvement in the economy to merit wage increases in the private sector? A majority said no to this appetising question, 45pc versus 43pc who said yes. The electorate would appear to be a little more cautious about economic management than the Government. Since premature wage increases in the private sector will put upward pressure on business costs, placing the recovery in employment at risk, the electorate's caution is well grounded. The only secure basis, in the absence of consumer price inflation, for pay increases in the private sector would be clear evidence that productivity is rising, or that labour is becoming scarce. A small majority of voters appear to think it is too early to draw either conclusion.

The same question was asked about pay in the public service. Here the balance of opinion was more negative, with 50pc against any increase and just 37pc in favour. Ministers who have been dropping helpful hints to the public service trade unions would appear to be out of tune with public opinion on this one.

The survey also asked for priorities should the Government be able to offer give-aways on taxes and public sector charges. The favourites here were water charges and the universal social charge (USC), with an income tax cut also popular. The strong showing of water charges as a candidate for reduction is rather a surprise. Water charges have already been cut, in the climbdown late last year, to a small fraction of the cost of running the system. There will be no reduction in water charges (effectively just €160 per annum net, after the grant, no more than the TV licence fee) in October's budget and they will rise steadily in the years thereafter - the stated intention of the policy is that Irish Water will become fully self-financing.

The (slight) preference for a cut in USC over a cut in income tax is interesting. USC has turned out to be a strong revenue-raiser but it is something of a blunt instrument compared to income tax, which has a complex but effective structure of credits, bands and rates of charge. The result is that income tax is more progressive than USC and the public may see the latter as some kind of temporary or emergency imposition. In this they are mistaken: whether reduced or left alone in October, USC will be around for a long time to come. The revenue it produces is simply too large to allow of anything beyond cosmetic changes.

October's budget looks as if it will continue the venerable Irish tradition of pursuing an expansionary fiscal stance when the economy is doing just fine without political interference. Economic growth reached almost 5pc last year and the forecasters expect growth at around 4pc in 2015 and 2016. The Irish economy is a big gainer from recent euro weakness and the Government's finances have benefited from low international interest rates. If two more years of rapid growth is a realistic expectation the unemployment rate will continue to drop and tax revenues will improve. The budget deficit will fall steadily if there is no budget at all, and could be close to zero at the end of next year. Given the enormous burden of inherited debt and the likelihood that there could be a few bad years coming down the road at some stage, the sooner the deficit is brought to zero the better. The eurozone architecture has not been fixed and another banking or sovereign debt crisis remains a risk until that issue is addressed.

The international good news, in the form of cheaper oil, low interest rates and a weaker euro, will not last forever. The next time the economy slows, any eurozone country with a zero deficit will be in a strong position to engage in countercyclical stimulus. If Ireland still has a deficit when that day comes, the fault will lie with those who eased up when there was no need to do so. The true cost of pre-election fiscal celebrations is the reduced room for manoeuvre the next time the going gets tough.

Sunday Independent

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