Sunday 26 May 2019

With real prudence we'd already have a strong budget surplus

The projected €800m in the State's coffers may disappear all too quickly in a budget carve-up, warns writes Colm McCarthy

SENSIBLE CAUTION: Finance Minister Paschal Donohoe is not stingyvisited
SENSIBLE CAUTION: Finance Minister Paschal Donohoe is not stingyvisited

Countries which have retained their own currencies can create liquidity, either for their government or their banks, although only in their own currency. Countries with no home currency are reliant solely on their capacity to attract and retain lenders on their merits as sovereign borrowers. Should they be unable to do so, they must resort to official agencies such as the IMF, or the troika arrangement which Ireland and several other eurozone countries relied on after the financial bust in 2008.

For a country without its own currency, the availability of volunteer lenders in an emergency will depend on how well they have managed their public finances. It helps too if they have been diligent in supervising their banks. The payoff for prudent financial management is that national sovereignty need not be sacrificed when trouble strikes.

It is not an accident that several eurozone countries, lacking a domestic currency, ended up in IMF bailouts, nor that these were the countries which had been least prudent in managing their public finances and banking systems.

Last week's Sunday Independent revealed that the Fine Gael party has been road-testing possible slogans for its general election campaign.

One of the candidates is 'Prudence over Promises' and the Summer Economic Statement released last Wednesday by Finance Minister Paschal Donohoe suggests that the road-test is going well. The Government will limit giveaways in October's budget to €800m and the Fianna Fail party must have been doing its own polling: their economic spokesman Michael McGrath indicated support for the minister's vision of prudence.

The Labour and Sinn Fein parties complained in the Dail that Donohoe was being stingy. The belief dies hard that the basement in the Department of Finance contains a copious vault stuffed with gold and jewels, to be unlocked by opposition parties on their ascent to power.

Whatever about Sinn Fein, Labour have had the opportunity to inspect the premises over the years and will have been disappointed. Both parties share an interpretation of European Union fiscal rules that is a new take on the Charlie McCreevy mantra that "if you have it, you spend it". The Labour/Sinn Fein update is "if the Commission will let you borrow it, you borrow it".

There are three snags with this approach. The first is that the European Commission does not lend money. The rules state only that if someone else will lend you the money it is within the rules to borrow up to certain limits. The second is that going to the limit next year would likely threaten a breach of the EU rules a year later - what's the point breaking the rules quickly?

The third, and much the most important, is that prudence is a national responsibility and cannot be outsourced to officials in Brussels. In the bubble years leading to the bust in 2008, Ireland operated well within the EU rule-book of the time. You know what happened next.

Neither the EU rules nor the actual performance of Irish budget policy these past few years measure up to a credible definition of prudence. If international debt markets get difficult (think Trump's trade war, Italy, Brexit), Ireland and other heavily indebted countries will struggle to borrowings as they mature. Ireland's ratio of outstanding debt to government revenue remains one of the highest in the eurozone.

It will fall to safe levels only if the economy continues to grow and budget policy is restrained. Safe levels will be defined by the attitude of the debt markets and not by the European Commission. In recent years the European Central Bank has backstopped eurozone sovereign borrowers by purchasing shed-loads of their bonds on favourable terms. The wind-down of this policy has already been announced.

The last time Ireland borrowed its way into trouble, in the late 1980s, it took over a decade of strong economic growth and the deliberate targeting of budget surpluses to regain the sovereignty of a high credit rating. The positions adopted by the Labour and Sinn Fein parties last week display an indifference to the loss of sovereignty which has already occurred and to its indefinite continuation.

Ireland has enjoyed cheap borrowing these past few years because a foreign central bank, the ECB, has been buying Irish government debt for non-commercial reasons.

This is not the kindness of strangers but the incidental benefit of a time-limited policy pursued by others to stabilise Europe's common currency project.

A country enjoying a burst of economic growth will see tax revenues improve and unemployment fall, reducing pressure on social expenditure programmes. The budget balance in Ireland would already have moved into surplus had prudence been the watchword and the opportunity taken to speed the restoration of sovereignty through the simple expedient of fiscal inactivity.

Each of the budgets since the exit from austerity in 2014 has seen tax concessions and expenditure increases ahead of inflation and Mr Donohoe has just promised more of the same. That he has taken criticism for excessive caution is a tribute to the national talent for forgetfulness.

Over the past four years, interest costs and spending on supporting the unemployed have fallen well below expectations. The unemployment rate is down to 5.3pc from a peak almost three times greater.

Meanwhile, overall government spending has risen at 3pc to 4pc per annum in the context of zero inflation.

The proceeds of recovery have been spent on arrival, to accompanying complaints about austerity. Mr Donohoe can point to the decade before 2008 as a period of fiscal profligacy (spending growth averaged 12pc while inflation was around 3pc) but there should be no boasting about prudence. The budget strategy outlined in the Summer Statement is risky and could come unstuck.

The figure available for the lobbying industry to pursue over the next three months will be the €800m indicated by the minister, given Fianna Fail's support. Actually a little less, since the award to the hospital consultants will cost a recurring €60m per annum and is not provided for, so the amount that remains to be fought over is €740m, just over 1pc of total government spending.

Under the terms of the confidence and supply arrangement with Fianna Fail, two-thirds of the €800m will go to public spending and one-third, say about €270m, to tax reductions. That works out at €5m per week or €2 per week per taxpayer. Coffees all round. By budget day the amount remaining for expenditure increases will be further depleted as others amongst the 300,000-strong public service seek to join the hospital consultants, who have been fortunate in their timing.

So there will be less than €500m in extra discretionary spending, compared to a budgeted total around 130 times that amount. €500m is the kind of money that could be absorbed in public service pay increases and miscellaneous overshoots before any election goodies are offered. The risk is clear: a return of bad luck externally and a relapse into stubborn deficits.

This is the fifth straight year of a vigorous economic expansion in Ireland, a background against which real prudence would already have achieved a strong budget surplus, the commencement of debt reduction and the return of economic sovereignty.

Sunday Independent

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